- Category: Judge Karlin
- Published on 23 September 2015
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Cornerstone Bank v. McClan Construction, LLC et al, 15-06067 (Bankr. D. Kan. Sep. 21, 2015) Doc. # 13
SIGNED this 21st day of September, 2015.
UNITED STATES BANKRUPTCY COURT
DISTRICT OF KANSAS
In re: Case No. 15-21434
Brett Eric Clanton Chapter 7
Sheryl Jean Clanton,
Plaintiff, Case No. 15-6067
v. Adversary Proceeding
McClan Construction, LLC,
NJ Trenching, LLC,
Brett Eric Clanton, and
Sheryl Jean Clanton,
Order Granting in Part and Denying in Part Motion to Abstain
and Remanding Proceeding
This adversary proceeding, although only recently pending in this Court, has a
long and tortured procedural history. This Court must now unfortunately add to this
Case 15-06067 Doc# 13 Filed 09/21/15 Page 1 of 20
procedural morass by addressing the notice of removal filed by state court Defendants,
McClan Construction, LLC (“McClan Construction”) and NJ Trenching, LLC (“NJ
Trenching”). The Court grants state court Plaintiff Cornerstone Bank’s Motion to
Remand this matter back to the state court where it has pended nearly five years.
I. Background and Procedural History1
Between 2010 and 2013, Cornerstone Bank obtained money judgments against
Debtors Brett and Sheryl Clanton in excess of $4 million, arising out of personal
guarantees Debtors gave to secure repayment of notes, also secured by now foreclosed
mortgages on real property.2 Cornerstone Bank then began proceedings to execute on
these money judgments under Kansas statutes governing executions of judgments.3
Cornerstone Bank issued garnishments to Defendants McClan Construction and NJ
Trenching based on testimony (given by one or both of the Debtors during hearings in
aid of execution) that Debtors worked for these entities.4
1 The facts as detailed herein are the apparently non-disputed facts gatheredfrom the parties’ pleadings and the facts as they appear on the docket of both thisadversary case and Debtors’ bankruptcy case.
2 Interestingly, Debtors’ Statement of Financial Affairs reflects that one ofthe Debtors was a Director of Cornerstone Bank beginning in 2001 and ending in2010.
3 See K.S.A. 60-2401 though 60-2420 (article 24 of chapter 60 of the Kansascivil statutes governing executions and orders of sale).
4 Both business entities are listed in Debtors’ Statement of Financial Affairs
as a business “in which the debtor was an officer, director, partner, or managingexecutive of a corporation, partner in a partnership, sole proprietor, or was self-
employed in a trade, profession, or other activity either full- or part-time . . . , or inwhich the debtor owned 5 percent or more of the voting or equity securities . . .” In
addition, in response to Question 19 which requires Debtors to list all bookkeepers
Case 15-06067 Doc# 13 Filed 09/21/15 Page 2 of 20
The “Answers of Garnishees” provided by McClan Construction and NJ
Trenching, however, stated that Debtors were not employed by these entities. As a
result, Cornerstone Bank filed an objection to the garnishment answers, a forensic
accountant was ultimately appointed, and the parties engaged in substantial discovery
supervised by the state court.
Following this discovery process, on January 2, 2015, Cornerstone Bank filed an
Amended Garnishment Objection. Within that Amended Objection, Cornerstone Bank
argued that Debtors were in fact employed by McClan Construction and NJ Trenching,
and that Debtors had received significant compensation from both companies.
Cornerstone Bank alleged that McClan Construction and NJ Trenching had paid at
least $646,801.97 toward Debtors’ mortgage and personal credit card debts in the time
since the Bank’s garnishment was issued.
The Bank’s Amended Garnishment Objection asked the state court to enter
judgment in its favor and against McClan Construction and NJ Trenching for either
1) the total amount of the judgments against Debtors, or 2) the sum of $164,141.99,
which is 25% of the amount paid by McClan Construction and NJ Trenching on
Debtors’ mortgage and credit card debt. The Amended Objection further asked the
state court to “impute income” of $40,425.12 per month to Debtors and order McClan
Construction and NJ Trenching to pay 25% of that income (or $10,106.28) to
and accountants who kept or supervised their accounts and records, Debtors notethat Sheryl Clanton was such a bookkeeper or accountant for “McCorkendaleConstruction, Inc. - (1987- 2012), NJ Trenching, LLC - (1998 - current), and McClanConstruction, LLC - (2012 -current).”
Case 15-06067 Doc# 13 Filed 09/21/15 Page 3 of 20
Cornerstone Bank each month until the Bank’s judgment against Debtors is satisfied.
Finally, Cornerstone Bank asked for an award of attorneys fees and other costs and
The garnishment litigation (i.e., the Amended Garnishment Objection) was
pending in state court when Debtors filed their chapter 7 bankruptcy petition on July
7, 2015. According to Cornerstone Bank, the parties had begun discovery related to the
Bank’s Amended Garnishment Objection, the parties had had nine separate hearings
before the assigned state court judge, and the state court had recently entered an order
permitting Cornerstone Bank to issue numerous business records subpoenas.
In their chapter 7 bankruptcy petition, Debtors list a $4.2 million claim against
them from Cornerstone Bank and other significant debt: half a million dollars owed to
the Internal Revenue Service for civil penalties, nearly $1.1 million in secured debt on
their homestead (which they value at $900,000), and more than a million dollars in
unsecured debt in addition to the debt owed Cornerstone Bank. Question 1 of the
Statement of Financial Affairs of Debtors’ petition requires debtors to state the gross
income received from “employment, trade, or profession, or from operation of the
debtor’s business, including part-time activities either as an employee or in
independent trade or business” for the two years immediately preceding the filing, and
Debtors stated, under penalty of perjury, that they received zero income from McClan
Construction and NJ Trenching, or from any employment.5 In addition, Debtors’
5 Question 1 doesn’t ask a debtor to state where he or she has not received
income within the last two years, so it is rare, indeed, to see the answer to this
Case 15-06067 Doc# 13 Filed 09/21/15 Page 4 of 20
Schedule I lists no true “income,” as that term is typically understood: rather, they list
$2064.17 in “other monthly income” and specify that this “income” is because “NJ
Trenching pays for health ins. and gas for business use.” Debtors’ Schedule J lists
$10,334.65 in monthly expenses, and states a monthly deficit of $8,270.48.
Twelve days after Debtors filed their bankruptcy petition, McClan Construction
and NJ Trenching filed a notice of removal of the state court garnishment litigation
pending against them, which initiated the adversary proceeding that is the subject of
this Order. In their notice of removal, McClan Construction and NJ Trenching allege
this Court’s jurisdiction arises under 28 U.S.C. § 157 and § 1334(a) and (b) and that the
removed action is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (E).
Specifically, McClan Construction and NJ Trenching allege the removed case involves:
[A] determination of the scope and extent of the Debtors’ interest inproperty (are the monies at issue “salary or wages” of the Debtors insteadof expense reimbursements of the Debtors), the nature, validity and scopeof Cornerstone’s interest in and to the property claimed to be salary, andif said property is determined to be salary, the amount of Debtors’exemption in said property.6
In response to the notice of removal, Cornerstone Bank filed its motion to remand, or
in the alternative, for the Court to abstain from hearing this matter.
question reflect “$0.00," as Debtors’ response states when then listing the “Source”
of this “non-income” as NJ Trenching and McClan Construction.
6 Doc. 1, Notice of Removal of Civil Proceeding.
Case 15-06067 Doc# 13 Filed 09/21/15 Page 5 of 20
A. This Court’s Jurisdiction
Under the federal statues governing removal, a party “may remove any claim
or cause of action in a civil action . . . to the district court for the district where such
civil action is pending, if such district court has jurisdiction of such claim or cause of
action under section 1334 of [title 28].”7 In support of its motion to remand this matter
to the state court, Cornerstone Bank argues this Court lacks jurisdiction to hear the
parties’ garnishment dispute.8
Under 28 U.S.C. § 1334(b), federal district courts have “original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or arising in or related to
cases under title 11.” In this district, pursuant to 28 U.S.C. § 157(a), which permits
7 28 U.S.C. § 1452(a).
8 As an initial matter, the parties debate whether there continues to be apresumption against jurisdiction over removed cases in federal courts. Compare
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (holding that acause of action is presumed to be outside the limited jurisdiction of federal courtsand that “the burden of establishing the contrary rests upon the party assertingjurisdiction”), with Dart Cherokee Basin Operating Co. v. Owens, ___U.S. ___, 135 S.
Ct. 547, 554 (2014) (referring to the “purported ‘presumption’ against removal”
relied on by the district court in remanding the case to state court, but holding sucha presumption did not apply where Congress had specifically enacted a federalstatute—there the Class Action Fairness Act— facilitating adjudication in federalcourts, and noting that the Court need not then decide whether “such apresumption is proper in mine-run diversity cases”).
Regardless of the continued existence of a presumption against jurisdiction inremoved cases, the party asserting subject matter jurisdiction has the burden ofproving the existence of that jurisdiction. 2 Moore’s Federal Practice § 12.30
(Matthew Bender 3d ed.); Radil v. Sanborn W. Camps, Inc., 384 F.3d 1220, 1224
(10th Cir. 2004). As a result, McClan Construction and NJ Trenching bear theburden of proving jurisdiction here.
Case 15-06067 Doc# 13 Filed 09/21/15 Page 6 of 20
referral to bankruptcy judges, the bankruptcy court has been referred “all cases under
title 11 and any or all proceedings arising under title 11 or arising in or related to a
case under title 11” by the district court.9 Pursuant to this referral, bankruptcy judges
may thus hear and determine all “core proceedings arising under title 11, or arising in
a case under title 11”10 and all proceedings “arising in or related to a case under title
Federal statutes aid in the determination of whether a matter is a “core
proceeding.” McClan Construction and NJ Trenching contend the Cornerstone Bank
Amended Garnishment Objection is a core proceeding under three sections of 28 U.S.C.
§ 157(b)(2). That statute defines core proceedings as “(A) matters concerning the
administration of the estate,” “(B) the allowance or disallowance of claims against the
estate or exemptions from property of the estate,” and “(E) orders to turn over property
of the estate.” Cases defining “core proceeding” shed additional light.12
The Tenth Circuit has defined core proceedings as those that “arise in” or “arise
9 D. Kan. S.O. 13-1; D. Kan. Rule 83.8.5.
10 28 U.S.C. § 157(b)(1).
11 28 U.S.C. § 157(a).
12 See Burgess v. Lederer (In re Burgess), No. 12-1743 MER, 2013 WL
1344580, at *2 (Bankr. D. Colo. Apr. 2, 2013) (calling the list of examples of coreproceedings in § 157(b)(2) instructive, but noting that the statute “does not entirelysettle the issue of whether . . . claims are, in fact, ‘core proceedings’” and statingthat debtors “must do more than simply attach a superficial classification to anasserted claim; rather, a debtor’s claim must substantially ‘arise under’ or ‘arise in’a case under title 11”).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 7 of 20
under” cases under title 11.13 “Matters ‘arise under’ title 11 if they involve a cause of
action created or determined by a statutory provision of title 11. Matters ‘arise in’ a
bankruptcy if they concern the administration of the bankruptcy case and have no
existence outside of bankruptcy.”14 To sum, core proceedings have no existence outside
of bankruptcy, depend on bankruptcy laws for their existence, and could not proceed
in another court.15
Cornerstone Bank argues that there is no core jurisdiction because answers to
garnishments are “purely issues of state law,” and any relief it obtains via its Amended
Garnishment Objection would be against McClan Construction and NJ
Trenching—neither of whom are debtors in any pending bankruptcy. As noted above,
in its Amended Garnishment Objection, Cornerstone Bank seeks two types of relief:
1) that judgment be entered against McClan Construction and NJ Trenching for either
the total amount of the judgments Cornerstone Bank has against Debtors or 25% of
what McClan Construction and NJ Trenching paid to Debtors’ creditors on Debtors
behalf during the relevant time period; and 2) that a monthly income of $40,425.12 be
imputed to Debtors and that McClan Construction and NJ Trenching be ordered to pay
13 Gardner v. United States (In re Gardner), 913 F.2d 1515, 1517–18 (10thCir. 1990).
14 Narro v. Ford Motor Credit (In re Narro), No. 11-1070 S, 2012 WL
4027258, at *9 (Bankr. D.N.M. Sept. 12, 2012) (citing Wood v. Wood (In re Wood),
825 F.2d 90, 96 (5th Cir. 1987) and Personette v. Kennedy (In re Midgard Corp.), 204
B.R. 764, 771 (10th Cir. BAP 1997)).
15 Santander Consumer, USA, Inc. v. Houlik (In re Houlik), 481 B.R. 661, 674
(10th Cir. BAP 2012).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 8 of 20
25% of that monthly imputed income each month to Cornerstone Bank until its
judgment is satisfied. The first category of requested relief is a judgment against the
garnishees McClan Construction and NJ Trenching. The second category of requested
relief, however, that monthly income be imputed to Debtors and that Cornerstone
Bank be paid part of Debtors’ monthly income, is more difficult to categorize.
Imputing income to Debtors, exempting a portion of that imputed income, and
ordering turnover of some or all of that imputed income to one particular creditor
holding a prepetition debt, could be read as involving “the administration of the
estate,” consideration of “exemptions from property of the estate,” and “orders to turn
over property of the estate” under the statutory “core” framework in § 157(b)(2). The
Amended Garnishment Objection certainly does not, however, involve a cause of action
created or determined by a provision of the Bankruptcy Code. In addition, the
resolution of the Amended Garnishment Objection “does not require the interpretation
or enforcement of bankruptcy law.”16 The garnishment action may impact the
bankruptcy estate, but it has an existence outside of bankruptcy and does not depend
on bankruptcy laws for its existence. The Amended Garnishment Objection has existed,
and could continue to exist, in another court. Viewed through the lens of “arising
under” or “arising in,” therefore, the Amended Garnishment Objection does not qualify
as a core proceeding.17
17 The cases cited by McClan Construction and NJ Trenching do notpersuade otherwise. For example, in In re Brickell, 142 F. App’x 385, 389 (11th Cir.
Case 15-06067 Doc# 13 Filed 09/21/15 Page 9 of 20
The next question, then, with regard to this Court’s jurisdiction, is whether the
Court has “related to” jurisdiction over the Amended Garnishment Objection.
Proceedings related to a bankruptcy case are those that “could have been commenced
in federal or state court independently of the bankruptcy case, but the outcome of that
proceeding could conceivably have an effect on the estate being administered in
bankruptcy.”18 To determine whether a matter is related to a bankruptcy case, courts
focus on “whether the action potentially impacts administration of the bankruptcy
estate.”19 “Although the proceeding need not be against the debtor or his property, the
proceeding is related to the bankruptcy if the outcome could alter the debtor’s rights,
liabilities, options, or freedom of action in any way, thereby impacting on the handling
and administration of the bankruptcy estate.”20
This Court is satisfied that the broad test for related to jurisdiction is met here.
Cornerstone Bank argues that the resolution of the Amended Garnishment Objection
2005), the Eleventh Circuit concluded that the garnishment of an estatedistribution was a core proceeding, but the facts there were very different from thesituation at hand. Here, the garnishment at issue is that of a third party’s paymentto a bankruptcy estate, not of a payment from the estate, and involves a disputeconcerning the answer thereto from non-debtor entities. McClan Construction andNJ Trenching also rely on In re Pulliam, 262 B.R. 539, 543 (Bankr. D. Kan. 2001),
and In re Urban, 262 B.R. 865, 866–67 (Bankr. D. Kan. 2001), but these cases standonly for the proposition that wages earned prepetition and paid either pre or postpetition are property of the estate to which a chapter 7 trustee could claim aninterest and to which Kansas exemption statutes on earnings could apply. Thosecases contain no discussion of “core” or jurisdiction at all.
18 Midgard, 204 B.R. at 771 (internal quotations omitted).
19 Houlik, 481 B.R. at 674.
20 Gardner, 913 F.2d at 1518 (internal citations and quotations omitted).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 10 of 20
will have no effect on the administration of Debtors’ bankruptcy estate because any
remedy obtained would only be against McClan Construction and NJ Trenching. But
the outcome of the Amended Garnishment Objection could conceivably have an effect
on the administration of Debtors’ bankruptcy estate. For example, as Debtors’ point
out, their tax liability could be impacted by a determination regarding income imputed
to Debtors and characterized as “earnings” by the state court, and this could have an
impact on Debtors’ liabilities and the claims made against Debtors’ estate.
Potential effects are all that are needed to bring the Amended Garnishment
Objection within this Court’s related to jurisdiction. The Court is satisfied it has
related to jurisdiction over this matter, and that is enough to resolve Cornerstone
Bank’s motion to remand based on jurisdiction.21
Next, Cornerstone Bank argues that this Court should abstain under 28 U.S.C.
§ 1334(c), which provides for both permissive abstention under subsection (c)(1) and
mandatory abstention under subsection (c)(2). As do the parties, the Court first
21 Although bankruptcy courts have jurisdiction to hear matters that are notcore proceedings but that are otherwise related to cases under title 11, thebankruptcy judge is required to “submit proposed findings of fact and conclusions oflaw to the district court, and any final order or judgment shall be determined by thedistrict judge . . . ” 28 U.S.C. § 157(c)(1). The parties may consent to entry ofjudgment by a bankruptcy court in a related to case, but no statement regardingCornerstone Bank’s position has been filed with this Court. See Fed. R. Bankr. P.
9027(e)(3) (requiring parties, within 14 days after the filing of a notice of removal,
to “file a statement admitting or denying any allegation in the notice of removalthat upon removal of the claim or cause of action the proceeding is core or non-core,”
and if alleging that the cause of action is non-core, “state that the party does or doesnot consent to entry of final orders or judgment by the bankruptcy judge”).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 11 of 20
assesses the applicability of mandatory abstention under § 1334(c)(2), which states:
Upon timely motion of a party in a proceeding based upon a State lawclaim or State law cause of action, related to a case under title 11 but not
arising under title 11 or arising in a case under title 11, with respect towhich an action could not have been commenced in a court of the United
States absent jurisdiction under this section, the district court shallabstain from hearing such proceeding if an action is commenced, and canbe timely adjudicated, in a State forum of appropriate jurisdiction.
The test to determine whether mandatory abstention applies is multi-factor.
“Mandatory abstention applies when all of the following elements are present: (1) the
motion to abstain was timely; (2) the action is based on state law; (3) an action has
been commenced in state court; (4) the action can be timely adjudicated in state court;
(5) there is no independent basis for federal jurisdiction other than bankruptcy; (6) the
matter is non-core.”22
Factors one through three (whether the motion to abstain was timely filed,
whether the Amended Garnishment Objection is based on state law, and whether the
matter was already commenced in state court) and factor five (that there is no
independent basis for federal jurisdiction other than bankruptcy) are not contested by
McClan Construction and NJ Trenching. The Court has already determined herein
that factor six (that the matter is non-core) is applicable. The remaining factor, and the
one the parties dispute, is factor four: whether the action can be timely adjudicated in
22 Telluride Asset Resolution, LLC v. Telluride Global Dev., LLC (In re
Telluride Income Growth, LP), 364 B.R. 390, 398 (10th Cir. BAP 2007).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 12 of 20
“The burden of proving timely adjudication is on the party seeking abstention.”23
When assessing this factor, courts “have focused on whether allowing an action to
proceed in state court will have any unfavorable effect on the administration of a
bankruptcy case” or the bankruptcy court’s efficient and expeditious handling of all
matters connected with the bankruptcy estate.24 The consideration of “timely
adjudication” is itself a multi-factor test:
In considering whether allowing a case to proceed in state court willadversely affect the administration of a bankruptcy case, courts haveconsidered some or all of the following factors: (1) backlog of the statecourt and federal court calendar; (2) status of the proceeding in statecourt prior to being removed (i.e., whether discovery had beencommenced); (3) status of the proceeding in the bankruptcy court; (4) thecomplexity of the issues to be resolved; (5) whether the parties consent tothe bankruptcy court entering judgment in the non-core case; (6) whethera jury demand has been made; and (7) whether the underlyingbankruptcy case is a reorganization or liquidation case.25
Some of these factors require the party moving for abstention to present evidence.26 For
example, the Tenth Circuit BAP has stated that evidence is required to demonstrate
“the status of the state court calendar and status of [the] proceedings in state court,”
but that other factors that are evident from the bankruptcy court and adversary record,
such as the status of the adversary proceeding, the consent of parties to have the
bankruptcy court enter judgments, and the nature of the underlying bankruptcy case,
23 Personette v. Kennedy (In re Midgard Corp.), 204 B.R. 764, 778 (10th Cir.
25 Id. at 778–79 (internal footnotes and citations omitted.
26 Id. at 779.
Case 15-06067 Doc# 13 Filed 09/21/15 Page 13 of 20
do not require evidence.27
Here, the Court has no evidence of any kind from the parties. For example, this
Court has no idea of the state court’s current backlog, if any, or how much work
remained, before removal, to be able to conclude this matter in state court. The parties
have mentioned the pre-removal issuance of business subpoenas, but no one has
provided any evidence to demonstrate where that issuance fits in the scheme of the
discovery time line, or how much work remains for the state court judge.
The Court can admittedly glean the status of the bankruptcy court proceeding
from a review of its docket sheet, but it is both very early in the bankruptcy case and
difficult to predict the issues that will eventually need resolved in Debtors’ bankruptcy.
Further, the parties have not yet consented to allow this Court to enter a final
judgment.28 As a result, because Cornerstone Bank has failed, as movant, to meet its
burden to show timely adjudication, this Court is left to conclude that mandatory
abstention under § 1334(c)(2) is not applicable.
The Court next assesses permissive abstention under § 1334(c)(1), which states:
[N]othing in this section prevents a district court in the interest of justice,
or in the interest of comity with State courts or respect for State law,
from abstaining from hearing a particular proceeding arising under title
28 The Court presumes, based on Cornerstone Bank’s filing of a motion toremand or abstain, that it would not consent to final adjudication in the bankruptcycourt. When a party does not consent to a bankruptcy court entering judgment in anon-core, related to proceeding, the bankruptcy court will make recommendationsto the district court, and this requisite, and thus more time-consuming, two-tierreview “may favor a finding of timely adjudication in a state court.” Id.
Case 15-06067 Doc# 13 Filed 09/21/15 Page 14 of 20
11 or arising in or related to a case under title 11.
Again, the Court will employ a multi-factor test, which includes:
1. the effect or lack of effect on the efficient administration of the estate
if a court abstains; 2. the extent to which state law issues predominateover bankruptcy issues; 3. the difficulty or unsettled nature of theapplicable state law; 4. the presence of a related proceeding commencedin the state court or other nonbankruptcy court; 5. the jurisdictionalbasis, if any, other than 28 U.S.C. § 1334; 6. the degree of relatedness orremoteness of the proceeding to the main bankruptcy case; 7. thesubstance rather than form of an asserted “core” proceeding; 8. thefeasibility of severing state law claims from core bankruptcy matters toallow judgments to be entered in state court with enforcement left to thebankruptcy court; 9. the burden on the bankruptcy court's docket; 10. thelikelihood that the commencement of the proceeding in bankruptcy courtinvolves forum shopping by one of the parties; 11. the existence of a rightto a jury trial; 12. the presence in the proceeding of nondebtor parties;
and 13. any unusual or other significant factors.29
As the party moving for this Court’s abstention under § 1334(c)(1), Cornerstone Bank
has the burden of establishing that permissive abstention is appropriate.30 “Permissive
abstention is a matter within the sound discretion of the bankruptcy court.”31
Because it is so early in the administration of Debtors’ Chapter 7 case, and
because of the limited related-to nature of the garnishment action, there should be only
a small effect, if any, on the administration of the bankruptcy case if this Court
abstains from hearing this matter. In addition, it seems clear that because state law
29 In re Lunt, No. 10-13712, 2011 WL 1656404, at *1–2 (Bankr. D. Kan. May2, 2011) (citing 1 Norton Bankr. L & Prac. 3d § 8.6 (Thompson/West 2010)).
30 In re Commercial Fin. Servs., Inc., 215 B.R. 397, 413 (Bankr. N.D. Okla.
31 In re Tri-Valley Distrib., Inc., No. BAP UT-05-119, 2006 WL 2583247, at *6
(10th Cir. BAP 2006).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 15 of 20
predominates the garnishment action, the state court is certainly an appropriate forum
to resolve any disputes therein. And the state court is obviously very familiar with the
law and facts here, as the parties and the pertinent garnishment issues have been in
front of that court for quite some time. There is no jurisdictional basis to bring the
garnishment action to this Court other than § 1334, and although this Court has
determined the state court action is related to the bankruptcy, it is not closely
intertwined and is not a core proceeding that requires any severing of the cause of
Turning to the remaining factors, this Court would not be burdened by retaining
this case on its docket, and the Court has no evidence of any forum shopping by
Debtors or McClan Construction and NJ Trenching, so these factors either lean in
favor of retaining the case or are neutral. The presence of nondebtor parties and the
consideration of other “unusual or significant factors,” however, are both significant
considerations here. Neither McClan Construction nor NJ Trenching are debtors or
creditors in Debtors’ bankruptcy, and the fact that the state court has been attempting
to resolve the garnishment issue between McClan Construction and NJ Trenching with
Cornerstone Bank for several years is a significant factor. Weighing all these factors,
32 Even if the Court is incorrect in its determination of core versus related-to
jurisdiction, and the Amended Garnishment Objection was a core matter ratherthan a related to matter, the Court would still exercise its discretion to abstain from
hearing the Amended Garnishment Objection under § 1334(c)(1), which isapplicable to “both core and non-core matters when abstention best serves theinterest of justice, judicial economy, or in the interest or comity with the statecourts.” The Scoular Co. v. Dalhart Consumers Fuel Assoc., Inc. (In re Podzemny),
No. 11-09-14226 JL, 2010 WL 1795269, at *6 (Bankr. D.N.M. May 3, 2010).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 16 of 20
and in the interest of comity with the state court and efficient and expeditious justice
for the parties, the Court concludes it should abstain from hearing this matter.
Both McClan Construction and NJ Trenching chiefly argue against permissive
abstention by alleging Cornerstone Bank has violated the bankruptcy automatic stay
because it did not release its wage garnishment upon receiving notice of Debtors’
bankruptcy, and that this is an “other significant factor” weighing in favor of this
Court’s retention of the garnishment case. In response, Cornerstone Bank counters
that because McClan Construction and NJ Trenching answered its garnishment that
Debtors were never employed at either entity, there was no garnishment to release
when Debtors filed their bankruptcy petition. Regardless, the Court does not find this
dispute changes its determination regarding permissive abstention. Whether there has
been a violation of Debtors’ bankruptcy automatic stay is a separate issue from the
determination of the proper court to decide Cornerstone Bank’s Amended Garnishment
Objection. Thus, if Debtors contend there has been a violation of the automatic stay
and wish to pursue that theory with this Court, this decision does not preclude them
from doing so.
C. Remand Based on Equitable Grounds
To complete the analysis, Cornerstone Bank also argues that the Court should
remand this matter to the state court under 28 U.S.C. § 1452(b), which permits remand
of removed cases “on any equitable ground.” Some courts have looked at equitable
factors when considering remand under § 1452(b), such as:
(1) forum non conveniens; (2) a holding that, if the civil action has been
Case 15-06067 Doc# 13 Filed 09/21/15 Page 17 of 20
bifurcated by removal, the entire action should be tried in the same court;
(3) a holding that a state court is better able to respond to questionsinvolving state law; (4) expertise of the particular court; (5) duplicativeand uneconomic effort of judicial resources in two forums; (6) prejudice tothe involuntarily removed parties; (7) comity considerations; and (8) alessened possibility of an inconsistent result.33
Other courts have determined that the “analysis of a request for equitable remand
under § 1452(b) and permissive abstention under § 1334(c)(1) is substantively the
For the reasons stated above in support of discretionary abstention, the equities
of this matter also require remand to state court. The state court is more familiar both
with the parties and with the litigation at hand than this Court is, and in the interest
of comity and justice, the equities justify remand. The state court has handled this
litigation and its attendant legal issues for multiple years and will be able to make a
determination with a smaller expenditure of judicial resources.
33 Orman v. Hollywood Motion Picture & Television Museum, No. 09-2333,
2009 WL 2914054, at *3 (D. Kan. Sept. 8, 2009) (quoting SBKC Serv. Corp. v. 1111
Prospect Partners, L.P., 204 B.R. 222, 225 (D. Kan. 1996)); see also Textron Inv.
Mgmt. Co. v. Struthers Thermo-Flood Corp., 169 B.R. 206, 211 ( D. Kan. 1994)
(stating factors as “whether (1) there is duplication of judicial resources oruneconomical use of judicial resources; (2) the remand will adversely affect theadministration of the bankruptcy estate; (3) the case involves questions of state lawbetter addressed by a state court; (4) there are comity considerations; (5) there isprejudice to unremoved parties; (6) the remand lessens the possibility ofinconsistent results; and (7) the court where the actions originated has greaterexpertise”).
34 Marah Wood Prods., LLC v. Jones, 534 B.R. 465, 477 (D. Conn. 2015).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 18 of 20
D. Attorneys’ Fees
Cornerstone Bank seeks an award of its attorneys’ fees and costs for what it
characterizes as McClan Construction and NJ Trenching’s “improper removal.” Under
28 U.S.C. § 1447(c), an “order remanding [a] case may require payment of just costs
and any actual expenses, including attorney fees, incurred as a result of the removal.”
A fee award under § 1447(c) is a discretionary decision.35 “[T]he standard for
awarding fees should turn on the reasonableness of the removal. Absent unusual
circumstances, courts may award attorney’s fees under § 1447(c) only where the
removing party lacked an objectively reasonable basis for seeking removal. Conversely,
when an objectively reasonable basis exists, fees should be denied.”36
Although the Court ultimately finds the parties’ dispute should be determined
by the state court, the filing of the notice of removal was not objectively unreasonable.
The notice of removal was done quickly after Debtors’ bankruptcy case was filed, and
it was not unreasonable to assert the parties’ garnishment litigation could have a
foreseeable effect on Debtors’ bankruptcy estate. The garnishment litigation touches
on questions of Debtors’ earnings, and obviously, employment and income are
important facets of the administration of a bankruptcy case. There appear to be no
unusual circumstances warranting an award of fees under § 1447(c), and the request
is therefore denied.
35 Auld v. Auld, 553 F. App’x 807, 808 (10th Cir. 2014).
36 Martin v. Franklin Capital Corp., 546 U.S. 132, 141 (2005).
Case 15-06067 Doc# 13 Filed 09/21/15 Page 19 of 20
This Court has subject matter jurisdiction over this cause of action, as it is
related to the administration of the bankruptcy case. However, because this case is
based on state law garnishment claims that, in the interests of comity and justice,
should be heard at the state court, this Court exercises its discretion pursuant to 28
U.S.C. § 1334(c)(1) and abstains from hearing this proceeding. For the same reasons,
the Court remands this matter to the state court under 28 U.S.C. § 1452(b). The Court
denies, however, Cornerstone Bank’s request for attorneys’ fees and costs.
Accordingly, Cornerstone Bank’s motion for discretionary abstention37 is granted
in part and denied in part. This proceeding is remanded to its original court for
The motion, filed by McClan Construction and NJ Trenching, for waiver of the
requirement under Federal Rule of Bankruptcy Procedure 9027 to file certified copies
of the state court file38 is denied as moot.
It is so ordered.
# # #
37 Doc. 6.
38 Doc. 2.
Case 15-06067 Doc# 13 Filed 09/21/15 Page 20 of 20
- Category: Judge Karlin
- Published on 22 June 2015
- Written by Judge Karlin
- Hits: 695
In Re Inyard,12-40260 (Bankr. D. Kan. Jun. 18, 2015) Doc. # 103
SIGNED this 17th day of June, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 12-40260
Frederick Mark Inyard, Chapter 13
Memorandum Opinion and Order Granting
Motion for Hardship Discharge
Did Congress intend to allow a discharge for those debtors who die
before they complete the payments required under their confirmed Chapter
13 plans? Although deceased debtors presumably no longer care about the
answer to that question, their heirs and creditors sometimes do. And that is
the situation here.
One of Debtor Frederick Inyard’s post-petition creditors—Josh
Saunders—was named administrator of Debtor's decedent estate in state
Case 12-40260 Doc# 103 Filed 06/17/15 Page 1 of 21
probate court,1 giving him standing to file a motion for hardship discharge in
this bankruptcy case.2 The Chapter 13 Trustee (Trustee) objected to the
motion, arguing that, as a matter of law, the Court has no authority to grant
a hardship discharge after a debtor’s death. Because the Court holds that it
does have that authority under 11 U.S.C. § 1328(b) and Federal Rule of
Bankruptcy Procedure 1016, and because such a discharge is appropriate
under the facts here, the administrator’s motion is granted.
I. Findings of Fact
The parties agree on the facts necessary to resolve this motion.3 When
Debtor voluntarily filed for relief under Chapter 13 in March 2012, he
claimed to be 79 years old, was receiving Social Security benefits,4 and listed
total liabilities of $60,753.5 Creditors filed claims totaling $41,573.6 By the
time he died in August 2014, Debtor had paid $20,148 towards completion of
his Chapter 13 Plan—$16,203 of which came from his post-petition
1 Doc. 89 at ¶11.
2 Doc. 91.
3 Doc. 101, Stipulation of Facts.
4 Debtor included his age on Schedule I, which was filed under penalty of
perjury. He noted in response to Question 2 in his Statement of Financial Affairsthat the main source of income was Social Security. Doc. 1.
5 Doc. 101, Stipulation of Facts ¶ 2.
6 See Claims Register Summary within the Court’s CMECF records.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 2 of 21
liquidation of non-exempt personal property.7 Trustee used approximately
$14,934 of that sum to satisfy priority claims and to make a pro rata payment
to unsecured creditors who had filed claims, and he used the remainder to
pay trustee and attorney fees.8 Since Debtor was a below medium income
debtor, he should have completed the plan payments within three years—a
time period that would have expired by now if he started making plan
payments when required by statute and if he had made them consistently. As
it is, Debtor made 29 plan payments and has a base balance still owed of
$525.00 (7 more payments of $75.00).9 This means to complete his entire plan
and receive a discharge, he was only $525 short. These remaining payments
would have gone towards repayment of a small additional pro rata portion of
the claims of unsecured creditors.
Debtor’s only scheduled asset of any significant value when he filed his
case was his exempt homestead, which he valued at $95,200 (with no
mortgage debt). Aside from the property he auctioned before confirmation,10
Debtor’s other scheduled property consisted only of an exempt pickup,
7 Doc. 101, Stipulation of Facts ¶¶ 4–5.
8 Doc. 97, Trustee’s Report of Receipts and Disbursements.
9 Doc. 101, Stipulation of Facts ¶ 5.
10 Doc. 48.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 3 of 21
miscellaneous exempt household goods, clothing, and jewelry, as well as
several nonexempt vehicles, all of inconsequential value.
II. Conclusions of Law
The court has jurisdiction over this case under 28 U.S.C. § 1334, and
this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J), over which the
Court has the authority to enter a final order.
Under 11 U.S.C. § 1328(b),11 a bankruptcy court may grant a hardship
discharge at any time after confirmation of a plan, even when plan payments
have not been completed. Federal Rule of Bankruptcy Procedure 4007(d)
dictates the procedure to be followed in hardship discharge proceedings; it
requires that all creditors be given notice of the deadline to both object to the
motion and to file any objections to discharge under § 523(a)(6). No creditor
filed an objection to the motion or an adversary proceeding seeking a
determination of dischargeability, notwithstanding the mailing of that notice
to creditors. Only the Chapter 13 Trustee has objected to the motion.12
11 All future statutory citations will be to Title 11 of the United States Code,
unless otherwise noted.
12 Doc. 91.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 4 of 21
The debtor bears the burden of proof when seeking a hardship
discharge,13 and so the debtor—or his designee—must prove all three
elements of 11 U.S.C. § 1328(b):
(1) the debtor's failure to complete such payments isdue to circumstances for which the debtor should not
justly be held accountable;
(2) the value, as of the effective date of the plan, ofproperty actually distributed under the plan on accountof each allowed unsecured claim is not less than the
amount that would have been paid on such claim if theestate of the debtor had been liquidated under chapter7 of this title on such date; and
(3) modification of the plan under section 1329 of thistitle is not practicable.
The Trustee agrees that Debtor’s failure to complete his plan payments
is due to circumstances for which he should not justly be held accountable14
and that unsecured claimants have received even more than they would have
received had Debtor originally filed a Chapter 7 case.15 He also agrees that
modification of the plan is not practicable.16 These admissions by the only
13 Roberts v. Boyajian (In re Roberts), 279 F.3d 91, 93 (1st Cir. 2002)(holdingthat “[t]he ultimate evidentiary burden to establish an entitlement to a hardshipdischarge under Bankruptcy Code § 1328(b)(1) rested upon [the debtor]”).
14 Doc. 95, Objection to Motion for Hardship Discharge ¶ 3(a).
15 Doc. 101, Stipulation of Facts ¶ 11.
16 Doc. 95, Objection to Motion for Hardship Discharge ¶ 3(c). Trustee alsoagrees that other potential statutory barriers to discharge are inapplicable here,
admitting: 1) it is now impossible for Debtor to complete the Personal FinancialManagement Course required by §1328(g)(1), id. at ¶ 3(d); 2) Debtor has not
Case 12-40260 Doc# 103 Filed 06/17/15 Page 5 of 21
objecting party would typically be sufficient to warrant granting a motion for
hardship discharge, but the Trustee here contends both that, as a matter of
law, a deceased debtor is ineligible for a hardship discharge, and that, even if
a deceased debtor may be granted a hardship discharge, such a discharge is
not warranted in this case.
As a result, the Court must make two determinations here. First, the
Court must determine whether a deceased debtor is eligible for a hardship
discharge when death is the only factor rendering him unable to complete his
plan. Second, because the Court answers that question in the affirmative, the
Court must determine whether a hardship discharge is warranted under the
facts of this case.
Federal Rule of Bankruptcy Procedure 1016, entitled “Death or
Incompetency of Debtor,” governs bankruptcy proceedings following the death
of a debtor. It states, in pertinent part:
If [an] . . . individual's debt adjustment case is pendingunder . . . chapter 13 [when a debtor dies], the case maybe dismissed; or if further administration is possibleand in the best interest of the parties, the case may
previously received a discharge under any Chapter , id. at ¶ 3(e); 3) Debtor claimeda homestead exemption below the statutory amount for debtors who meet certaincriteria under 11 U.S.C. §522(q)(1)(A), id. at ¶ 3(f); and 4) Trustee has no knowledgeof any proceeding pending in which the Debtor may be found guilty of a felony asdescribed in 11 U.S.C. § 522(q)(1)(A) or any liability for a debt of the kind describedin §522(q)(1)(B), id. at ¶ 3(g).
Case 12-40260 Doc# 103 Filed 06/17/15 Page 6 of 21
proceed and be concluded in the same manner, so far aspossible, as though the death or incompetency had notoccurred.
Under Rule 1016, then, either this case may be dismissed, or, if the Court
determines that further administration of the case is possible and is in the
best interest of the parties, the case may proceed and be concluded in the
same manner as though Debtor were still alive.
As a preliminary matter, the Court must determine whether the
administrator of Debtor’s probate estate is an appropriate party to pursue
further administration of the case. Interestingly, Rule 1016 does not require
that another party be substituted for the debtor, and, indeed, there appears to
be no mechanism in the Rules to allow for substitution of another party with
regard to the normal administration of the case. This becomes more
complicated in two situations.
First, under Fed. R. Bankr. P. 7025, Fed. R. Civ. P. 25 applies in
adversary proceedings and requires substitution of a new party for the
deceased debtor if the claims at issue survive the debtor’s death and the case
requires the debtor’s (or, rather, the debtor’s representative’s) participation to
continue. Absent a motion to substitute, the debtor’s death would lead to
dismissal of the adversary. Second, under Fed. R. Bankr. P. 9014, “unless the
court directs otherwise,” Fed. R. Civ. P. 25 applies in all contested matters,
Case 12-40260 Doc# 103 Filed 06/17/15 Page 7 of 21
including objections to a motion for a hardship discharge.17
At a hearing in November 2014, on the Trustee’s Motion to Dismiss18
and creditor Josh Saunders’ objection to that motion, the Court ordered that
the case be dismissed unless “within 60 days an Administrator in State Court
is appointed and files something in this Court in response to the Motion to
Dismiss.” In response, the administrator sought and received that
appointment from the state court.19 Since that time, this bankruptcy case has
proceeded with the administrator representing Debtor’s interests. As a result,
the Court will not require strict compliance with Fed. R. Civ. P. 25 (that
Saunders be substituted as the debtor), as is the Court’s prerogative under
Fed. R. Bankr. P. 9014.
The Court also notes that the mere existence of all these rules
governing the need for substitution—or the lack thereof —suggests that
17 The Rules do not clarify what happens when a debtor dies and there is nopending adversary or contested matter. Intuiting from the procedures in thosecases, however, it appears that a representative of the debtor’s estate could proceedwith administration of the case. There does not appear to be a proceduralrequirement for substitution in that case, but the issue is not before the court.
Indeed, anything that would bring such a situation before the Court, such as anobjection to a motion or the filing of an adversary proceeding, would bring the issuewithin the boundaries of Fed. R. Bankr. P. 9014 or 7025, which would allow
substitution of another party for the deceased debtor.
18 Doc. 85.
19 Doc. 89.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 8 of 21
Congress knew bankruptcy cases could continue after a debtor’s death, at
least in some circumstances. And certainly, some party must act on the
Debtor’s behalf, if the case is to continue as permitted by Rule 1016.
A recent Northern District of Illinois case is persuasive on this issue:
Rule 1016 permits a case to continue despite thedeath of the debtor without the formal substitution of
another party for the debtor. The case can only“continue” or “proceed” if someone is permitted to actin the bankruptcy case on behalf the deceased debtor.
If no party could ever act on behalf of a deceaseddebtor because there is no separate rule specificallyproviding for formal substitution, the provisions inRule 1016 allowing a case to continue after thedebtor's death would be meaningless. The onlyinterpretation that gives meaning to these provisionsin the rule is that no formal substitution is necessary.
. . . Under Rule 1016, an appropriate representativeof the debtor may act on behalf of the debtor withouta formal substitution.20
The Trustee here does not dispute that movant is a proper representative of
the deceased Debtor, nor that a deceased debtor can pursue administration of
the case.21 Further, no one disputes that a person’s eligibility to file a
20 In re Kosinski, No. 10 bk 28949, 2015 WL 1177691, at *3 (Bankr. N.D. Ill.
March 5, 2015). As noted above, when another party to the case objects or otherwise
creates a contested matter, under Fed. R. Bankr. P. 9014, “unless the court directs
otherwise,” Fed. R. Civ. Proc. 25 applies and would require substitution.
21 See In re Shepherd, 490 B.R. 338, 340 (Bankr. N.D. Ind. 2013) (seeking a
hardship discharge for a deceased debtor does not require replacing the debtor with
Case 12-40260 Doc# 103 Filed 06/17/15 Page 9 of 21
bankruptcy petition is determined at the commencement of a case,22 and no
party in interest objected to Debtor’s eligibility to file his bankruptcy when he
did so in 2012. In light of these facts, the Court holds that the administrator
is an appropriate party to pursue further administration of the case. Having
resolved that preliminary procedural matter, the Court turns to the Trustee’s
A deceased debtor remains eligible for a hardship
discharge when death is the only factor rendering
him unable to complete his plan.
The Trustee first argues that, as a matter of law, Rule 1016 precludes a
hardship discharge for a deceased debtor. In short, he reads Rule 1016's
allowance of “further administration of the state . . . in the same manner, so
far as possible, as though the death or incompetency had not occurred” as
barring a hardship discharge based on Debtor’s death, arguing that
considering a debtor’s death as the reason for the discharge is inherently not
proceeding as though the death had not occurred.23 In other words, the
Trustee seems to suggest that only if someone agrees to and does pay the
remaining plan payments on behalf of the deceased debtor could a discharge
be granted, and that a hardship discharge would never be available.
22 Id. at *5.
23 Doc. 95.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 10 of 21
Courts that have addressed this question are split, but the vast
majority hold that Rule 1016 does not, as a matter of law, bar a hardship
discharge for a deceased debtor, even if no further payments are made after
death.24 The parties cite no binding precedent on this issue, and the Court has
Certainly, the rule is susceptible to the Trustee’s interpretation, but the
rule could be read just as easily to allow discharge. In other words, one could
also interpret the statute to allow the case to proceed in the same manner as
if the debtor were still alive but unable to make payments due to
circumstances for which the debtor should not justly be held accountable, that
is, to allow the hardship discharge. The only difference between the normal
hardship discharge and the discharge sought in this case is the debtor’s
Under Rule 1016, the Court should conclude the case “in the same
manner, so far as possible, as though the death or incompetency had not
occurred,”25 and in the case of a deceased debtor, that could be read to
24 See Kosinski, 2015 WL 1177691, at *2 (“Almost all courts addressing thisissue have reached the same conclusion, with some noting that a hardshipdischarge is not only available but is “the only reasonable alternative.”); In re Frank
Lizzi, Nos. 09–10097, 10–13875, 2015 WL 1576513, at *4 (Bankr. N.D.N.Y. April 3,2015)(“A majority of courts agree that a hardship discharge is available to adeceased debtor.”).
25 Fed. R. Bankr. Proc. 1016.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 11 of 21
prevent the Court from denying the debtor a discharge solely because he is
dead. The Court finds no suggestion in the Rules or the Code that the “further
administration” of the case envisioned by Rule 1016 cannot include
administration via a hardship discharge.26
Although both of these readings of the rule are plausible, “there is
nothing in the Code prohibiting a deceased debtor from receiving a hardship
discharge.”27 Particularly, nothing in § 1328(b) limits the hardship discharge
to a living debtor. And, given that the Federal Rules are not to “abridge,
enlarge, or modify any substantive right,”28 the Court hesitates to interpret
Rule 1016 to limit any debtor’s substantive right to a hardship discharge.29
26 In re Hoover, No. 09–71464, 2015 WL 1407241, at *2 (Bankr. N.D. Cal.
March 24, 2015)(“[F]urther administration of the case can encompass a hardshipdischarge.”). In addition, the Trustee was holding $325 as of May 1, 2015 thatwas paid in by the Debtor before his death, but which remained undisbursed whenthe most recent Trustee Report was filed May 1, 2015. See Doc. 97. Those funds are
thus also apparently available for further administration.
27 Lizzi, 2015 WL 1576513, at *4 (finding deceased debtors should be grantedhardship discharge even though creditors holding priority claims had not yet beenpaid in full, and unsecured creditors had received nothing).
28 28 U.S.C. § 2705.
29 Some commentators have argued that 28 U.S.C. § 2705’s prohibition onbankruptcy rules that “abridge, enlarge, or modify any substantive right” preventsa court from even considering Rule 1016 when evaluating a deceased debtor’srequest for a hardship discharge, although few or no courts appear to have takenthis position. Alan M. Ahart, Whether to Grant a Hardship Discharge in Chapter
13, 87 Am. Bankr. L.J. 559, 575 n.127 (2013)(“Where the matter before the court isthe deceased debtor's motion for a hardship discharge, the court must not evaluatewhether further administration of the case is possible or in the best interest of the
Case 12-40260 Doc# 103 Filed 06/17/15 Page 12 of 21
The hardship discharge has a long lineage, dating to the 1938 Chandler
Act.30 The modern version of the hardship discharge originated in the
Bankruptcy Reform Act of 1978, when Congress liberalized the requirements
for a hardship discharge by striking Chandler Act language requiring the
debtor himself to apply for the discharge and by eliminating a time-in-plan
requirement, among other changes.31 This liberalized standard appears to
have led to an increase in the discharges issued to deceased debtors. Indeed,
many of the early hardship discharge cases—decided soon after the 1978
Code was enacted— explicitly limited the discharge to cases of deceased
debtors,32 and Congress has made no move to restrict this practice during the
thirty plus years that have followed. In light of this history and of the plain
language at issue, the Court holds that neither the text of § 1328(b) nor Rule
1016 bar a deceased debtor from receiving a hardship discharge.33
parties under Federal Rule of Bankruptcy Procedure 1016. The court should simplydetermine whether the three elements for a hardship discharge under BankruptcyCode § 1328(b) have been satisfied. The court must not consider Rule 1016 becauseno Bankruptcy Rule may abridge, enlarge or modify any substantive right, such asthe right to a hardship discharge where all of the statutory requirements have been
met. See 28 U.S.C. § 2075 (2012).”).
30 Id. at 560–61.
31 Id. at 562.
32 Id. at 563.
33 Cf. Lizzi, 2015 WL 1576513; Hoover, 2015 WL 1407241; Kosinski, 2015 WL
Case 12-40260 Doc# 103 Filed 06/17/15 Page 13 of 21
The Trustee argues against this position based on two recent cases from
two Colorado bankrutpcy courts—obviously both within the Tenth
Circuit—that each denied a deceased debtor a hardship discharge. In the
first, In re Fogel,34 the debtor died one month after plan confirmation. His
wife, acting as his personal representative, continued making the payments
required by the plan, but failed to inform the court of debtor’s death until she
had completed all payments. The court concluded that the debtor’s wife was
not a party, as envisioned by Rule 1016, and declined to consider her interests
in a discharge.35 The Court also held, with little explanation, that in a
Chapter 13, “the continued existence of the debtor is crucial to the continued
administration of case.”36
The Court appears to give short shrift to Rule 1016, and fails to explain
who could be an appropriate party to continue pursuing a deceased debtor’s
case, as envisioned by that rule. The Court may have determined that the
debtor’s wife was not truly acting as a personal representative of the debtor,
but was instead merely acting in her own self interest, but this is not clear
from the opinion. In any case, the Court does not find the reasoning in In re
34 512 B.R. 659 (Bankr. D. Colo. 2014).
36 Id. at 663.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 14 of 21
Fogel persuasive, and declines to adopt that court’s restrictive reading of Rule
The reasoning in the second case, In re Miller,37 is also difficult to parse.
The district court in Miller, reviewing a bankruptcy court decision, stated
that, “In this case, the debtor has made no showing that a hardship discharge
would be in the best interest of the parties to the bankruptcy case. A hardship
discharge based on the death of the debtor does not satisfy the requirements
of Rule 1016.”38 It is unclear from these statements, and from the remainder
of the decision, if the district court found that a court could never grant a
hardship discharge to a deceased debtor under Rule 1016, or whether,
instead, it intended to hold that its particular debtor should not be granted a
discharge under the specific facts of that case.
If the Miller court interpreted Rule 1016 to bar discharges as a matter
of law for deceased debtors, this Court disagrees, for the reasons articulated
above. If the basis for the district court’s decision was that the facts of that
case did not merit discharge, then that decision is easily distinguished.
Again, under the facts in Miller, the district court appeared to believe
that the personal representative of the debtor based her argument that
37 526 B.R. 857 (D. Colo. 2014).
38 Id. at 861.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 15 of 21
continued administration (in the form of a discharge) was in the best interest
of the parties solely on the benefits that would accrue to her, the personal
representative. This Court agrees that Rule 1016 requires the Court to look
more broadly. As Rule 1016 states, a court should continue administration of
the case only if doing so is “in the best interest of the parties,” not merely in
the personal interest of a party who purports to represent the debtor’s
These two cases, which are not controlling authority for this Court, do
not change the Court’s analysis here. In both Miller and Fogel, the courts
expressed concern about the fairness of granting a hardship discharge when
that holding would result in wholly unsecured second mortgages being
stripped from the surviving non-debtor spouse’s home. Unlike the facts in
both the Colorado cases, there is no mortgagee whose lien will be stripped if
the hardship discharge is granted here, so the equities differ between those
cases, and this one. As the Miller court noted, “Section 1328(b) provides that
the court ‘may’ grant a discharge if the specified circumstances are shown.
Use of the word ‘may’ indicates that the grant of such a discharge is within
the discretion of the court.”39 And this Court is using that discretion to grant
the discharge here.
39 Id. at 862.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 16 of 21
The best interest of the parties merits granting a
hardship discharge in this case.
Having held that a deceased debtor may receive a hardship discharge
as part of the further administration of his case, the Court turns to the second
part of Rule 1016. Is it in the best interest of the parties to allow further
administration, in the form of a hardship discharge, with final distribution of
funds on hand pursuant to the confirmed plan? Where do the equities lie?
First, the Court considers the interests of the pre- and post-petition
creditors.40 The pre-petition priority creditors have already been paid in full,
and there were no secured creditors.41 A discharge would not impact the
secured and priority creditors in any way.
The unsecured creditors have already received payments in a larger
amount than they would have received if Debtor had filed his case under
Chapter 7. Debtor’s plan required him to liquidate certain non-exempt
40 The Court considers the interests of the post-petition creditors because theadministrator, in his capacity as a post-petition creditor, has filed motions in the
case. See, e.g., Docs. 84, 86, and 89. The Court also notes that, in his present role asadministrator of Debtor’s probate estate, the administrator has a fiduciary duty torepresent the probate estate, not merely himself as only one post-petition creditor.
In re Lohse, 207 Kan. 36, 37 (1971).
41 Doc. 97, Trustee’s Report of Receipts and Disbursements through May 1,2015.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 17 of 21
property, which sale he completed even before his plan was confirmed, and he
thereafter paid into the estate the amount the Trustee agreed was necessary
for distribution pursuant to the plan’s provisions and applicable law.42 And,
significantly, after notice, not a single pre-petition creditor has objected to the
grant of a hardship discharge. Because the unsecured creditors have already
had some recovery—more than they would have been entitled to receive in a
Chapter 7, and because none of those creditors object to discharge, the Court
finds that it would not be inequitable to deny the unsecured creditors further
recovery (by granting a hardship discharge).
This determination also finds support from the policy goals of the
bankruptcy code. To deny a discharge under the facts of this case, when a
deceased debtor is unable to complete his plan but has paid in more to his
unsecured creditors than had he filed a Chapter 7, would discourage debtors
from filing Chapter 13 proceedings because it would allow pre-petition
creditors to seek additional recovery against his probate estate. That
interpretation would defeat Congress’s clear preference for debtors to attempt
Chapter 13 plans.43
42 Doc. 48 (requiring Debtor to pay $16,023.85 of the sale proceeds to theTrustee for payment of “trustee’s fees, administrative attorney fees, priority taxes,
and then to general unsecured claims”) and § 1325(a)(4).
43 In re Woolsey, 696 F.3d 1266, 1275 (10th Cir. 2012)(opting for aninterpretation of the bankruptcy code that would not be “contrary to Congress's
Case 12-40260 Doc# 103 Filed 06/17/15 Page 18 of 21
Turning to post-petition creditors, the Court finds they would clearly
benefit from a hardship discharge, because they will not have to share pro
rata (in the assets of the probate estate) with the creditors whose claims were
provided for, partially paid in the plan, and now (soon to be) discharged. Post-
petition creditors, like Mr. Saunders, the movant and administrator, have
had no recovery thus far from the bankruptcy estate, and equity favors
allowing them the potential to have a possibly greater recovery within
Debtor’s probate estate by issuing a hardship discharge. Weighing the
interests of all the creditors, then, the Court find that allowing the hardship
discharge is equitable, in that it allows the best chance for all creditors to
have some recovery.
Third, to the extent chapter 13 Trustees have additional interests
separate and apart from the creditors’ interests in whether courts should
grant hardship discharges to deceased debtors under similar facts, there has
been no showing that those unique interests are affected by granting a
hardship discharge here. Thus, the Trustee’s interest in preserving the
integrity of the bankruptcy system is not jeopardized.
Lastly, equity favors giving this deceased Debtor the benefit of a
hardship discharge. Debtor paid in over $20,000 to his bankruptcy estate, and
preference for individual debtors to use Chapter 13 instead of Chapter 7”).
Case 12-40260 Doc# 103 Filed 06/17/15 Page 19 of 21
was attempting to fulfill the requirements of his confirmed plan when he
died. He was 29 months into a plan that required payments over 36 months,
and he owed only $575 to complete his plan and receive his “§ 1328(a) full
compliance discharge.”44 Penalizing him (or his heirs, if their interests can
even be considered) because he died when he had completed over two-thirds
of the payments under the plan does not comport with the Bankruptcy Code’s
goal of giving deserving debtors a fresh start. The Court notes that it is
appropriate to consider the equities with respect to the Debtor himself,
because as noted above, despite his death, he remains eligible for further
administration of his case, and he is an appropriate person for consideration
when balancing the equities. He is represented by the administrator, and
nothing in the Rules or the Code suggest that the Court should not continue
to consider his interests when making this determination.
Balancing these interests, the Court determines that a hardship
discharge is in the best interest of the parties to the case. The Motion for
Hardship Discharge is granted, and the Trustee’s objection to that motion is
As a final matter, the Court grants Debtor’s request for a waiver of the
personal financial management course requirement under 11 U.S.C. §
44 Doc. 101, ¶ 3.
Case 12-40260 Doc# 103 Filed 06/17/15 Page 20 of 21
1328(g)(1). Under the plain text of that statute, the requirement “shall not
apply with respect to a debtor who is a person described in section 109(h)(4),”
which includes debtors unable to complete the course due to “incapacity,
disability, or active military duty in a military combat zone.” The Trustee
agrees that Debtor’s death rendered him unable to complete the course,45 and
the Court waives this requirement.
It is, therefore, ordered that the Debtor’s Motion for Hardship
Discharge is granted, and Debtor is excused from complying with the
requirement under 11 U.S.C. § 1328(g)(1) to complete a course on personal
# # #
45 Id. at ¶ 8.
12-40260 Doc# 103 Filed 06/17/15 Page 21 of 21
- Category: Judge Karlin
- Published on 03 June 2015
- Written by Judge Karlin
- Hits: 568
In Re Brines, 14-40442 (Bankr. D. Kan. Jun. 1, 2015) Doc. # 83
SIGNED this 28th day of May, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 14-40442
Jason Daniel Brines Chapter 13
Wendy Lynn Brines,
Order Denying in Part and Granting in Part Intrust Bank’s Motion for
Relief from the Automatic Stay
Creditor INTRUST Bank, N.A. (hereinafter “Intrust Bank”) seeks relief from the
automatic stay to pursue myriad business property securing a note executed by the
corporation Mobile Gameden, Inc. (hereinafter “Mobile Gameden”), a corporation wholly
owned by Debtors Jason and Wendy Brines. As collateral for the note, Mobile Gameden
gave Intrust Bank a security interest in certain business property, and as further
security for repayment of the corporate loan, Debtors gave Intrust Bank a second
mortgage on their home. Intrust Bank originally sought stay relief to proceed against
Debtors’ home, but its brief in support of its motion now abandons that portion of its
Case 14-40442 Doc# 83 Filed 05/28/15 Page 1 of 11
motion. As a result, stay relief against Debtors’ real property is denied.
Because the Court concludes, however, that the codebtor stay under 11 U.S.C. §
13011 does not apply to Mobile Gameden and the business property securing the Intrust
Bank note, the Court grants Intrust Bank’s motion to proceed against that business
property, if state law so allows.
I. Background and Procedural History
Debtors and Intrust have stipulated to the facts,2 which are highly summarized
here. Debtors filed a Chapter 13 bankruptcy petition in April 2014 and their proposed
chapter 13 plan,3 amended twice,4 remains unconfirmed. Although Debtors’ second
amended plan acknowledges a debt of $55,000 to Intrust Bank, and Intrust filed a claim
for $49,549, the parties agree that only $42,696.99 is now owed, that payments Mobile
Gameden owes to Intrust are current, and that Debtors’ last plan requires them to
directly make the ongoing monthly $1,260 payment on the note.
In March 2015, with Debtors’ second amended plan still unconfirmed, Intrust
Bank filed a motion for relief from stay because Mobile Gameden was then delinquent.
Intrust sought an order terminating the stay to permit it to enforce its remedies in state
1 All future statutory references are to Title 11 of the United States Code, unless
2 Doc. 76.
3 Doc. 3.
4 Doc. 31.
Case 14-40442 Doc# 83 Filed 05/28/15 Page 2 of 11
court against certain business property and Debtors’ residence.5
Debtors incorporated Mobile Gameden and are the corporation’s sole
shareholders. Shortly after incorporation, Mobile Gameden executed a note in favor of
Intrust Bank, and gave Intrust Bank a security interest in miscellaneous assets of the
company, including a 1997 Beck 38' Gooseneck trailer and all accounts, contract rights,
inventory, equipment, machinery, furnishings, furniture, chattel paper, instruments,
general intangibles, and rights of payment of Mobile Gameden. On November 30, 2012,
Mobile Gameden refinanced the note with Intrust Bank and gave Intrust Bank a
further security interest in a 1993 Ford Econoline E351 and an assortment of games
(Zorba Balls, Laser Tag, Archery Tag, and Mighty Wraps). This collateral will
collectively be referred to as the “business property.” When the note was refinanced,
Debtors also personally gave Intrust Bank a second mortgage on their residential
property, located in Benton, Kansas.
The parties agree the business property is worth approximately $28,000, and that
there is $55,000 equity in Debtors’ home. Accordingly, there is $83,000 worth of
collateral securing a debt of approximately half that amount.
Intrust Bank’s motion for relief from stay sought relief under §362(d) without
identifying the applicable subsection, although the motion argued that Intrust Bank
was not adequately protected because of the declining value of the business property
and that its position with respect to the real property may be impacted by the large first
5 Doc. 66.
Case 14-40442 Doc# 83 Filed 05/28/15 Page 3 of 11
mortgage held by Quicken Loans. Intrust Bank then argued that cause existed to lift
the automatic stay so that it could “realize its in rem interest” in both the business
property and real property.
At the first hearing on Intrust Bank’s motion, and in subsequent briefing, the
focus of the requested relief changed. Intrust Bank now withdraws that portion of its
motion for stay relief as to Debtors’ real property. As to the business property, however,
Intrust Bank argues that because the debt owed by Mobile Gameden is not a “consumer
debt” owed by an “individual,” § 1301 of the Bankruptcy Code does not apply to grant
Mobile Gameden any stay protection at all, and that Intrust should be permitted to
proceed against the business property without the need to seek stay relief.
By its statutory terms, the automatic stay of § 362(a), and by extension the
related adequate protection issues of § 362(d), apply only to debtors, property of debtors,
and property of the estate.6 While the scope of the automatic stay in § 362 is broad, its
terms do not extend beyond actions “against the debtor or the property of the
bankruptcy estate.”7 As a result, the relief sought by Intrust Bank against Mobile
6 See Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1991)
(“Although the scope of the automatic stay is broad, the clear language of section 362(a)
indicates that it stays only proceedings against a ‘debtor’—the term used by the statute
itself.”); In re Cook, No. 7-04-17704-SA, 2011 WL 3501844, at *5 (Bankr. D.N.M. Aug. 9,
2011) (“[T]he automatic stay does not protect anyone except the debtor or property of the
debtor or of the estate.”).
7 See Chizzali v. Gindi (In re Gindi), 642 F.3d 865, 870 (10th Cir. 2011), overruled
on other grounds by TW Telecom Holdings Inc. v. Carolina Internet Ltd., 661 F.3d 495 (10th
Cir. 2011) (noting that § 362’s automatic stay protects debtors and a debtor’s assets); see
also Teachers Ins. & Annuity Ass’n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir. 1986) (“It is
Case 14-40442 Doc# 83 Filed 05/28/15 Page 4 of 11
Gameden, who is not a debtor in this case, is not governed by § 362.
In addition, the fact that Debtors are the sole owners of the corporate entity—
Mobile Gameden—does not bring the collateral and assets of Mobile Gameden within
Debtors’ bankruptcy estate. Even when a debtor owns one hundred percent of the stock
of a corporation, “the property interest of the debtor’s bankruptcy estate extends only
to the intangible personal property rights represented by the stock certificates.”8 The
property of the business entity is not the property of the individuals who own shares in
As § 362 does not apply to Intrust Bank’s request to proceed against Mobile
Gameden’s business property, the Court next turns to the codebtor stay of § 1301.
Section 1301 governs the stay of actions against a codebtor, and states, in pertinent
(a) . . . [A] creditor may not act, or commence or continue any civil action,
to collect all or any part of a consumer debt of the debtor from any
individual that is liable on such debt with the debtor, or that secured such
debt, unless– –
(1) such individual became liable on or secured such debt in the
well-established that stays pursuant to § 362(a) are limited to debtors and do not
encompass non-bankrupt co-defendants.”).
8 Peoples Bankshares, Ltd. v. Dep’t of Banking (In re Peoples Bankshares, Ltd.), 68
B.R. 536, 539 (Bankr. N.D. Iowa 1986). See also Donarumo v. Furlong (In re Furlong), 660
F.3d 81, 89, 89 n.9 (1st Cir. 2011) (calling it “well-settled” that the automatic stay does not
extend to the “assets of a corporation in which the debtor has an interest, even if the
interest is 100% of the corporate stock” (internal citation omitted)).
9 See In re Rodio, 257 B.R. 699, 701 (Bankr. D. Conn. 2001) (applying concept to an
LLC); In re Calhoun, 312 B.R. 380, 384 (Bankr. N.D. Iowa 2004) (same; “The separate legal
existence of a corporation is respected in bankruptcy. The automatic stay does not stay
actions against separate entities associated with the debtor.”).
Case 14-40442 Doc# 83 Filed 05/28/15 Page 5 of 11
ordinary course of such individual’s business; or
(2) the case is closed, dismissed, or converted to a case under
chapter 7 or 11 of this title.
. . .
Intrust Bank argues that the codebtor stay of § 1301 applies only to individuals,
and not to Mobile Gameden, the corporation of which Debtors are the sole shareholders.
Intrust Bank also argues that the codebtor stay of § 1301 applies only to holders of
consumer debt, and that, because here the codebtor Mobile Gameden is liable as a
business debtor, § 1301 again does not apply to provide a codebtor stay.
First, the Court addresses the applicability of § 1301 to the business Mobile
Gameden (who the parties agree is a corporate entity)—an argument not squarely
addressed by Debtors. The term “individual” as it is used in § 1301 is not defined by the
Bankruptcy Code, and there are few cases that have needed to elaborate on the
commonly understood definition.10
The Court can locate only one case addressing whether § 1301 is applicable to a
business entity, rather than to an “individual,” as that term is commonly understood.
In In re McCormick,11 the Chapter 13 debtor sought extension of the bankruptcy stay
in § 362(a) to protect his wholly owned limited liability company (“LLC”).12 The debtor
was the sole member of the LLC, and judgments had been issued against both the
10 The common definition for “individual” is “a single human,” or “a person.” The
American Heritage Dictionary of English Language, 893 (4th ed. 2006).
11 381 B.R. 594 (Bankr. S.D.N.Y. 2008).
12 Id. at 596.
Case 14-40442 Doc# 83 Filed 05/28/15 Page 6 of 11
debtor and the LLC.13 With little discussion, the bankruptcy court in McCormick
concluded that § 1301 did not apply to the LLC, as the LLC was not an individual with
consumer debt.14 Ultimately, the bankruptcy court refused to extend the codebtor stay
of § 1301 to the debtor’s non-filing LLC because the company was not an individual
entitled to § 1301 protection.15 The bankruptcy court reasoned that the extension of the
automatic stay for individuals with consumer debts is a “limited extension”—so limited
by its very terms.16
Debtors admit that Mobile Gameden is a corporation and that the corporation is
the sole owner of all the business collateral of which Intrust Bank seeks stay relief.
Because it is clear that Mobile Gameden is not an individual, as that term is used in §
1301, like the LLC in McCormick, the limited stay provided to codebtors in § 1301
simply does not apply to this corporate business entity. In addition, although the
Bankruptcy Code does not define “individual,” it does define “person” in § 101(41) as
including an “individual, partnership, and corporation.” This provides additional
support for the conclusion that Congress intended the word “individual” to not include
Even if § 1301 was applicable to the corporate entity, which it is not, the debt for
the business property also does not satisfy the second prong that would make § 1301
13 Id. at 596–97.
14 Id. at 598.
Case 14-40442 Doc# 83 Filed 05/28/15 Page 7 of 11
applicable. The codebtor stay of § 1301 applies only to “consumer debt,” which is defined
by the Bankruptcy Code as a “debt incurred by an individual primarily for personal,
family, or household purpose.”17 The Tenth Circuit has stated a debt is not a “consumer
debt” when “it is incurred with a profit motive.”18
Debtors have stipulated that none of the business property is used primarily for
personal, family, or household purposes. Further, the facts show that Mobile Gameden
executed a note in favor of Intrust Bank, secured by a significant portion of Mobile
Gameden’s business property. That note was refinanced in November 2012 into a new
note; the new note incorporated the previously given business property as security,
added additional business property of Mobile Gameden, and gave Intrust Bank a second
mortgage on Debtors’ home. It is clear from this time line of events that, although
Debtors did give a small second mortgage on their home when Mobile Gameden
refinanced its debt in 2012, the “primary” purpose of the debt remained to provide
capital to fund the profit-seeking endeavors of Mobile Gameden. Debtors already had
a first mortgage on their home, and the second mortgage given to Intrust Bank was
purely for the refinance of Mobile Gameden’s business debt. As a result, the debt at
issue was incurred by and for the business venture, not for Debtors’ “personal, family,
or household purpose” as required by the Bankruptcy Code’s definition of “consumer
Rather than address the above issue head-on, Debtors only marginally address
17 § 101(8).
18 Citizens Nat’l Bank v. Burns (In re Burns), 894 F.2d 361, 362 (10th Cir. 1990).
Case 14-40442 Doc# 83 Filed 05/28/15 Page 8 of 11
these issues by citing cases where a bankruptcy court relies on its equitable powers
under § 105(a) to grant injunctive relief prohibiting collection against a Chapter 11
debtor’s corporate officers when those collection efforts would impact the Chapter 11
debtor’s reorganization.19 These cases, while recognizing that the automatic stay of §
362 “does not forbid actions against [the bankruptcy estate’s] non-debtor principals,
partners, officers, employees, co-obligors, guarantors, or sureties,” analyze the propriety
of granting such stay relief under general injunction standards.20 Under this analysis,
the bankruptcy court must ask whether the debtor will successfully effectuate a plan
of reorganization, whether irreparable harm to the debtor will occur if an injunction is
not granted, whether injunctive relief will cause substantial harm to the opposing party,
and whether the public interest is best served by issuing the injunction.21
But these cases arise solely in the Chapter 11 context. The cases themselves
recognize the differences between Chapter 11 and Chapter 13: “The legislative history
shows that Congress may have considered the issue of a general stay of actions against
guarantors in reorganization cases, but apparently rejected such a blanket stay and
limited co-debtor stays to chapter 13. See 11 U.S.C. § 1301. As enacted, chapter 11
19 See, e.g., TRS, Inc. v. Peterson Grain & Brokerage Co. (In re TRS, Inc.), 76 B.R.
805 (Bankr. D. Kan. 1987); Mahaffey v. E-C-P of Ariz., Inc., 40 B.R. 469 (Bankr. D. Colo.
20 TRS, Inc., 76 B.R. at 807–08; see also Mahaffey, 40 B.R. at 472 (utilizing same
injunction standards in Chapter 11 case; not addressing § 362).
21 TRS, Inc., at 808–09; Mahaffey, 40 B.R. at 472..
Case 14-40442 Doc# 83 Filed 05/28/15 Page 9 of 11
contains no specific provision authorizing stays against third parties.”22 Debtors cite no
examples,23 and this Court has found none, where a bankruptcy court extended the
automatic stay in the Chapter 13 context to a non-debtor corporation under an
injunctive relief theory under § 105(a).24 Congress already considered codebtor stays in
the Chapter 13 context with the enactment of § 1301, and this Court will not use
equitable powers to expand that stay.
The majority of Debtors’ brief can be described as a policy argument why the
Court should not construe the statute as it is written. Debtors, while acknowledging
that the Kansas “tools of trade” exemption does not apply to the business property at
issue, argue that, similar to that exemption, they should be able to protect the assets
that Debtor Jason Brines uses to secure his sole source of income. Debtors claim that
allowing Intrust Bank to repossess the Mobile Gameden business property would be
devastating to their chance of reorganizing their personal finances, and that
“individuals and businesses alike will be less comfortable supporting the endeavors of
the other, which ultimately is not a good precedent for the overall economy and small
22 Id. at 807.
23 Debtors cite one Chapter 13 case, Rupp v. Cloud Nine, Ltd. (In re Cloud Nine,
Ltd.), 3 B.R. 202 (Bankr. D.N.M. 1980), but all that case concludes is that § 362 stays
actions against the debtor, and that actions that do not involve the debtor may proceed in
state court. Id. at 204. The bankruptcy court noted a stay under § 1301 was not before the
court at that time. Id. As a result, this case provides no support for Debtors’ position here.
24 See Saleh v. Bank of Am. (In re Saleh), 427 B.R. 415, 422 (Bankr. S.D. Ohio 2010)
(“[T]his court has found no examples or support for extending the automatic stay or issuing
an injunction in a Chapter 13 case to protect a separate commercial entity like an LLC or a
Case 14-40442 Doc# 83 Filed 05/28/15 Page 10 of 11
business environment.”25 But the Court can do no more than follow the clear statutory
language and case law outlined above. If Congress wished to extend the codebtor stay
to the situation at hand, then it would not have used the language it did in § 1301.
Debtors chose to operate their business as a corporate entity and enjoyed the benefits
the corporate entity provided them; they cannot now avoid the more painful realties of
their decision by ignoring the corporate nature of their business.26
Intrust Bank’s motion for relief from the automatic stay27 is denied in part and
granted in part. To the extent Intrust Bank’s motion seeks stay relief to proceed against
Debtors’ real property, that portion of the motion is denied. The Court concludes,
however, that the codebtor stay of § 1301 is not applicable to Mobile Gameden and the
business property securing the Intrust Bank note, and the Court grants that portion of
Intrust Bank’s motion seeking to proceed against the Mobile Gameden business
It is so Ordered.
# # #
25 Doc. 73 at 6.
26 Although this Court grants relief from stay as to the business collateral, such
grant should not be interpreted to suggest that Intrust Bank could succeed were it to
proceed against Mobile Gameden in state court, under the terms of the note, at a time when
the corporation is totally current on the note and the Bank is protected by collateral it
stipulates is worth almost twice the amount of the debt due. That will be an issue for the
state court to decide.
27 Doc. 66.
Case 14-40442 Doc# 83 Filed 05/28/15 Page 11 of 11
- Category: Judge Karlin
- Published on 16 June 2015
- Written by Judge Karlin
- Hits: 635
In Re Combs, 11-21183 (Bankr. D. Kan. Jun. 16, 2015) Doc. # 43
SIGNED this 16th day of June, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 11-21183
Dante A. Combs, and Chapter 7
Alicia P. Combs,
Opinion and Order Granting
Debtors’ Motion to Reopen their Bankruptcy Case
Debtors Dante A. Combs and Alicia P. Combs filed a voluntary Chapter
7 Bankruptcy Petition in April 2011.1 They received their discharge in August
2011, and the Court simultaneously closed their case.2 In March 2014, Debtor
Dante Combs, a young African American man, sued Lounge KC, LLC,
Entertainment Concepts Investors, LLC, Entertainment Consulting
1 Doc. 1.
2 Doc. 21.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 1 of 23
International, LLC, and The Cordish Companies, Inc. (hereafter Cordish), for
actions he now believes those entities initiated or sanctioned, or both, when,
three times in a relatively short period of time, he was allegedly treated
differently than Caucasian patrons of the Kansas City Power and Light
District (P&L District).
The lawsuit, filed in the United States District Court, Western District
of Missouri, alleges discrimination in violation of 42 U.S.C. § 1981.3 But
Cordish seeks to prevent Mr. Combs from presenting any evidence of that
alleged discrimination, and recovering any damages resulting from it, if any,
under theories of judicial estoppel, standing, and laches, arguing that Mr.
Combs lost his right to proceed with the lawsuit because he waited too long to
seek to amend his bankruptcy schedules to disclose this potential asset. The
issue has surfaced in this Court via Debtors’ Motion to Reopen4 their 2011
Chapter 7 bankruptcy proceeding to allow them to list as a “contingent claim”
the lawsuit against Cordish; Cordish has objected to that motion.5 After
hearing evidence, which included the sworn testimony of Debtor and his wife,
the Court concludes both that Cordish lacks standing to pursue this objection
3 Case No. 2014CV00227.
4 Doc. 25
5 Doc. 29.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 2 of 23
and that Debtors’ omission of the contingent claim was inadvertent. Because
the Court finds that Cordish lacks standing to object, the Court overrules
Cordish’s objection. Because the Court finds that the Debtors’ omission was an
innocent mistake entirely devoid of bad faith, the Court grants Debtors’
Motion to Reopen.
I. Findings of Fact
As a preliminary matter, ascertaining the truth of Mr. Comb’s
discrimination allegations against Cordish was not the purpose for the hearing
held June 5, 2015. As a result, these background facts on the discrimination
issue only present his side of the story. Conversely, the hearing gave both
Cordish and Combs an opportunity to present evidence on facts relevant to
reopening the bankruptcy, and the Court here makes findings of fact on that
In August 2010, Combs was meeting friends in the P&L District at
Makers Mark when he and one of his friends were attacked by another
customer. Security personnel who may have been connected with Cordish
detained him and his friend, but let the attacker—a Caucasian male, walk
away. Combs was ultimately told to leave. At that time, he felt he had been
treated unfairly, and it felt like discrimination because the Caucasian male
who had started the fight was treated more favorably by the security
Case 11-21183 Doc# 43 Filed 06/16/15 Page 3 of 23
personnel. But it never occurred to him that he had enough evidence or any
basis to bring any kind of lawsuit against the security staff; he never
considered filing an action at that time. As a young black male, this was
hardly the first time he had experienced discrimination, and he decided to just
move forward instead of dwelling on the traumatic incident.
Combs was also during this time experiencing financial problems as a
result of owning some rental housing units during the housing crisis.6 He and
his wife filed Chapter 7 bankruptcy about 8 months after the first P&L
incident. On his Schedule B, item 21, Debtor was to list his “contingent and
unliquidated claims of every nature;”7 he did not disclose any potential lawsuit
he might have against Cordish or anyone else.8 When asked in this
proceeding—some four years after he completed that Schedule, why he failed
to list this as a “contingent” asset, he said although he reviewed his schedules
and signed them under penalty of perjury, there was nothing about the P&L
incident that would have made him consider it “property,” or an “asset” or a
“claim.” He has no legal training, and nothing about the words used in
Schedule B, # 21 made him even consider the single P&L incident that
6 Exhibit C, first paragraph.
7 Doc. 1, Schedule B, “Type of Property, 21.”
8 He listed no claims against anyone in answering Question 21, including any
claim he might have had against his actual attacker for assault.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 4 of 23
occurred to him 8 months earlier as he completed his schedules. He had no
intent whatsoever to file a lawsuit against anyone at the time he filed his
bankruptcy petition; the P&L incident had occurred months earlier, and he
had long since decided to just get on with life. He had no inkling that he might
even have a claim, and thus had no motive to not list the lawsuit on Schedule
B. It simply did not occur to him.
Creditors had until late August 2011 to file any objections to Debtors’
discharge. None were filed, and, immediately after that deadline, the Court
issued the discharge order and the bankruptcy case was promptly closed.
Between the date the bankruptcy was filed and the discharge was granted—a
time when little was going on in the bankruptcy as the parties were merely
awaiting the running of the discharge objection deadline, Combs again went to
the P&L District and once again experienced what felt to him to be
discrimination. This time it was at a different club, where he had to stand in
line to be admitted with friends. He was wearing typical business clothes for
him (a suit or suit pants and a shirt), as his job as a pharmaceutical
representative required, but the doorman several times denied him access to
the club. Finally, when he insisted on knowing why, he was told to step out of
line and show his driver’s license, and then was told he was being denied
access because his pants were “too baggy.” This felt like pretense to him, but
Case 11-21183 Doc# 43 Filed 06/16/15 Page 5 of 23
once again, he processed what had happened to him, speaking with his lawyer
friends, and decided that he should just forget the incident and try to move on.
A third incident occurred at the P&L district in July 2011, at yet
another establishment—Tengos. Combs was attempting to text friends he was
meeting, when an unknown Caucasian male knocked his phone from his
hands, causing it to break and fall apart. He assumed the person was simply
intoxicated and had been reckless until that man returned (as Combs was
retrieving the phone pieces) and verbally assaulted him, used profanity and
tried to pick a fight. Combs did not engage in the fight, but security personnel
nevertheless suddenly surrounded Combs and escorted Combs out of the P&L
district. Combs believes the attacker was, again, neither detained nor turned
over to police.
Even after all three of these incidents, Combs apparently did not
connect any dots. He again vented his frustration with friends, some of whom
were lawyers, about the incident, but never considered that he had a claim or
that he would sue anyone. That all changed—for the first time—three years
later, in early 2014, when media reports surfaced alleging that management of
the P&L district was employing purposeful strategies to discourage African
Americans from coming to the district and/or encouraging them to get into
fights so they would get kicked out of the district and/or be taken to jail. One
Case 11-21183 Doc# 43 Filed 06/16/15 Page 6 of 23
allegation was that P&L management was hiring (off the payroll) “white
rabbits”—men hired to provoke fights.
After hearing these reports, Combs for the first time connected the dots
and decided that he had been a target of deliberate discrimination. He
considered the problem and decided that if anyone was going to take on this
issue, and be a voice for social justice, it would have to be someone like him.
Combs is a well-educated and articulate black male with a professional job
and a family, with no criminal record—someone who a jury might find
imminently believable. Only after consulting a lawyer in the spring of 2014
did he decide to file suit.
Cordish has now filed a summary judgment motion in that lawsuit,
seeking to bar Combs from going to trial on these allegations. Cordish asserts
two summary judgment theories that are relevant here: (1) that Combs lost
his standing to sue Cordish when Combs declared bankruptcy, because if the
suit is an asset, only the Chapter 7 Trustee assigned to his case, Steve Rebein,
would have standing, and (2) that Combs must be judicially estopped from
suing Cordish and recovering any damages because Combs failed to list the
“claim” he had against them when he filed his bankruptcy petition in April
Case 11-21183 Doc# 43 Filed 06/16/15 Page 7 of 23
When Combs learned of this defense to his suit, he came to
understand—for the first time—that Cordish was interpreting the single pre
petition incident at Makers Mark in August 2010 as a “contingent claim” and
that they were asserting he should have listed that “asset” on Schedule B.
Although he still didn’t understand how the incident could be construed an
asset or property, he decided to put the issue to bed by simply amending
Schedule B to list the lawsuit. He followed his bankruptcy lawyers’ advice to
seek to reopen his bankruptcy to list this lawsuit (or at least any portion of
any damage award that might accrue from the seemingly smaller piece that
occurred pre-petition), fully recognizing that if he were to recover any damages
9 Although Cordish argues that Debtors should have updated their schedulesafter the second and third incidents, the Court notes that Cordish has supplied nobinding Tenth Circuit precedent for its argument that Debtors, who filed a Chapter7 bankruptcy, were under a continuing obligation to update their schedules toreflect the changing nature of the claim at issue here. The Tenth Circuit suggeststhat courts requiring an update to the schedules take a minority view, and theTenth Circuit has explicitly rejected arguments for judicial estoppel based on afailure to update the schedules in a Chapter 7 proceeding. “[I]t appears that theview that a debtor's duty to amend a properly reported schedule with newinformation about the evolving estimate of value of a litigation claim is a minorityview at best. If we are going to weigh in on this issue in this circuit, it should be in abankruptcy case where the question is whether a discharge of bankruptcy should begranted to a debtor given his failure to amend his schedules, and not in a judicialestoppel case.” Vehicles Market Research v. Mitchell Int’l, 767 F.3d 987, 999 (10thCir. 2014). The Court will not evaluate the Debtors’ failure to update theirschedules after the second and third alleged incidents, but focuses instead onDebtors’ failure to disclose the claim based on the first incident.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 8 of 23
from the initial incident, that the Chapter 7 trustee would have the
opportunity to elect whether to administer those funds for the benefit of his
Cordish has objected to the Motion to Reopen, claiming it is too late for
Combs to amend his schedules and claiming that Combs is not acting in good
faith. Cordish tried to establish at the trial on this motion that Combs is
motivated not by a true desire to list the asset to potentially get a recovery for
his unsecured creditors, but to line his own pocket with any damage award.
At the trial, attended by Rebein, the Court asked Rebein whether he had
had an opportunity during the relatively short time the Motion to Reopen had
been on file to consider the value of this potential asset and whether he
wanted to administer this potential asset as the Trustee. Rebein indicated he
had fully investigated this asset—the single pre-petition incident that was the
first of three incidents that constitute the lawsuit, and that he intended to
abandon it, as he did not believe it held any value to the estate worth
10 Cordish argues the Court should “have doubts about Mr. Combs’ innocent
intentions”regarding the failure to include the claim on Schedule B because Mr. Combs
stated in an affidavit that he had paid his creditors in full, notwithstanding receipt of a
discharge, when he has apparently not paid all of them. While no court ever condones
any false statement, this testimony did not serve to undermine the Court’s overall belief
in the credibility of Mr. Combs’ testimony on the main issues surrounding the Motion
Case 11-21183 Doc# 43 Filed 06/16/15 Page 9 of 23
This matter constitutes a core proceeding over which the Court has the
jurisdiction and authority to enter a final order.11
The decision to reopen a bankruptcy case is within the discretion of the
bankruptcy judge.12 A court’s discretion to reopen a case is broad but must be
“tethered to the parameters of § 350(b).”13 Section 350(b) allows a case to be
reopened in the court where it was closed “to administer assets, accord relief
to the debtor, or for other cause.” As a practical matter, motions to reopen a
case should only be granted if the underlying relief requested can be granted
by the bankruptcy court.14 Here, the underlying relief requested is the
addition of this lawsuit to the Debtors’ list of personal property in Schedule B,
and that question, whether Debtors may amend their schedules to add this
asset, ultimately controls whether the Court can and should grant their
motion to reopen.
As a preliminary matter, Debtors argue that Cordish lacks standing to
11 See 28 U.S.C. § 157(b)(2)(A) (stating that matters concerning the
administration of the estate are a core proceeding); § 157(b)(1) (granting authorityto bankruptcy judges to hear core proceedings).
12 See, e.g., In re Rosinski, 759 F.2d 539, 541 (6th Cir. 1985).
13 In re Apex Computer Corp., 71 F.3d 353, 356 (10th Cir. 1995).
14 In re Jester, 2014 WL 7408943 at *2 (Bankr. E.D. Okla. 2014) (citing In re
Schicke 290 B.R. 792, 798 (10th Cir. BAP 2003)).
Case 11-21183 Doc# 43 Filed 06/16/15 Page 10 of 23
object to the Motion to Reopen.15 In the Tenth Circuit, at the appellate level, a
party appealing a court’s decision to grant a motion to reopen must meet the
“person aggrieved” standard, under which appellate review is available only to
“those persons whose rights or interests are directly and adversely affected
pecuniarily by the decree or order of the bankruptcy court.”16 And the Tenth
Circuit BAP has ruled that a defendant, like Cordish, in a separate action
brought by a debtor, does not meet the person aggrieved standard and thus
lacks standing to object to a motion to reopen.17 As a result of this binding
precedent, the Court concludes that Cordish lacks standing to pursue this
objection, and therefore overrules its objection.
Nevertheless, because reopening is a discretionary action by the Court,
the Court must still weigh the merits of the Motion to Reopen and determine
whether to grant that motion. In weighing that Motion, the Court finds that
Cordish’s arguments frame the main issues surrounding the Motion, and so
15 Although this issue was raised by the Combs before Cordish’s brief was
due, Cordish regrettably elected not to address its own standing.
16 Holmes v. Silver Wings Aviation, Inc., 881 F.2d 939, 940 (10th Cir.1989)
(internal quotation marks omitted).
17 Riazuddin v. Schindler Elevator Corp. (In re Riazuddin), 363 B.R. 177, 183
(10th Cir. BAP 2007) (“Appellee's claim that its defense in the personal injury casemay be affected by the reopening is insufficient to give it a direct interest in theDebtors' bankruptcy case, and therefore, it lacked standing to oppose the motions toreopen.”).
Case 11-21183 Doc# 43 Filed 06/16/15 Page 11 of 23
the Court will analyze the Motion around their arguments.
The Court notes that, although the district court in the discrimination
suit in Missouri will apply Eighth Circuit law, this Court is bound by Tenth
Circuit precedent in interpreting the motion to reopen (here, for the purpose of
amending Schedule B). The Tenth Circuit has addressed the standards for
evaluating a debtor’s motion to amend:
Debtors may amend bankruptcy schedules as amatter of course. But an amendment may be denied,
however, if there is bad faith by the debtor orprejudice to creditors. . . . The Bankruptcy Code doesnot define bad faith. Like most questions of motiveand intent, bad faith is a question of fact. Bad faithmay be established by circumstantial evidence, or byinferences drawn from a course of conduct. . . .
We also recognize that an inadvertent omissionmay be an affirmative defense to a debtor's failure todisclose an asset in bankruptcy. Inadvertence can beestablished by showing, among other things, either (1)
the debtor had no knowledge of the undisclosed asset,
or (2) the debtor had no motive to conceal it. Theburden of establishing inadvertence lies with thedebtor.18
Here, Cordish argues that the motion to reopen (and, implicitly, the eventual
amendment of the schedules) should be denied based on the theory of judicial
estoppel, on the theory that Mr. Combs lack standing to pursue his
18 Gillman v. Ford (In re Ford), 492 F.3d 1148, 1155-56 (10th Cir. 2007)
(citations and quotation marks omitted). The Court notes that reopening would notprejudice the creditors in any way.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 12 of 23
discrimination case, and on a more nebulous theory, that Debtors have simply
waited too long to seek to reopen their case and amend the schedules. But
Cordish’s judicial estoppel and standing theories are not properly raised in
this proceeding. Both of those theories are defenses to the discrimination case,
and can only be properly raised in the district court where that case is
proceeding. The matter before this Court is limited to the questions of
reopening and amending schedules; whether Mr. Combs is judicially estopped,
or lacks standing, do not directly bear on that decision.19
The Court has reviewed the elements of judicial estoppel, as set out by
the Supreme Court and as applied in the Eighth Circuit (the Circuit in which
the Missouri Western District Court resides). Judicial estoppel requires that,
first, a party's later position be clearly inconsistent with its earlier position;
second, the party has succeeded in persuading a court to accept that party's
earlier position; and third, the party seeking to assert an inconsistent position
would derive an unfair advantage or impose an unfair detriment on the
opposing party if not estopped.20
Tying these requirements together, there seems to be an overall
19 The Court notes that allowing Debtors to reopen this case and schedule thelawsuit would likely eliminate the standing issue entirely, given the Trustee’sintent to abandon the claim.
20 New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001).
Case 11-21183 Doc# 43 Filed 06/16/15 Page 13 of 23
requirement of deliberateness—judicial estoppel seeks “to protect the integrity
of the judicial process by prohibiting parties from deliberately changing
positions according to the exigencies of the moment.”21 In other words, “the
rule is intended to prevent improper use of judicial machinery.”22
In the Tenth Circuit, this is interpreted broadly. “Where a debtor has
both knowledge of the claims and a motive to conceal them, courts routinely,
albeit at times sub silentio, infer deliberate manipulation.”23 The law in the
Eighth Circuit is interpreted more narrowly, and courts there do not infer
deliberate manipulation from knowledge and motivation, but instead require
something beyond mere inadvertence.24 Here, then, Cordish’s judicial estoppel
arguments require, at a minimum, that Combs knew that he had a
discrimination claim against Cordish before he filed bankruptcy, that he had a
motive that led him to hide the claim, and that he did so in order to
21 Id. at 749–50 (internal citation and quotations omitted).
22 Id. at 750 (internal quotations omitted).
23 Queen v. TA Operating, LLC, 734 F.3d 1081, 2013 WL 4419322 (10th Cir.
August 20, 2013).
24 Stallings v. Hussman Corp., 447 F.3d 1041, 1049 (8th Cir. 2006)(“A rulethat the requisite intent for judicial estoppel can be inferred from the mere fact ofnondisclosure in a bankruptcy proceeding would unduly expand the reach of judicialestoppel in post-bankruptcy proceedings and would inevitably result in thepreclusion of viable claims on the basis of inadvertent or good-faith inconsistencies.
. . . Courts should only apply the doctrine as an extraordinary remedy when aparty's inconsistent behavior will result in a miscarriage of justice.”).
Case 11-21183 Doc# 43 Filed 06/16/15 Page 14 of 23
manipulate the system.
If these allegations were true, as Cordish argues, they would also be
sufficient to establish that Combs was seeking to reopen his bankruptcy case
and amend his schedules in bad faith,25 which is why this Court will evaluate
these elements. If Combs sought to reopen his bankruptcy in bad faith, the
Court would exercise its discretion to deny the Motion to Reopen.
For this reason, the Court will construe Cordish’s estoppel argument as
alleging the bad faith necessary to deny Debtors’ Motion to Reopen to amend
their Schedule B. When, as here, a party has failed to disclose an asset,
“inadvertent omission may be an affirmative defense to a debtor's failure to
disclose an asset in bankruptcy. Inadvertence can be established by showing,
among other things, either (1) the debtor had no knowledge of the undisclosed
asset, or (2) the debtor had no motive to conceal it. The burden of establishing
inadvertence lies with the debtor.”26
For the reasons articulated below, the Court finds no bad faith on the
part of Debtors. Debtors have met their burden of demonstrating that their
omission of the claim from Schedule B was inadvertent. Their failure to list
the claim was inadvertent because they had no knowledge that the P&L
25 In re Ford, 492 F.3d at 1155-56.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 15 of 23
incident constituted “property” or an “asset” that had to be disclosed, and
when they filed bankruptcy, they had no motive to conceal it.27 There is no
evidence that Debtors sought to manipulate the court system.
In short, I find no evidence even suggesting that Debtors failed to
disclose this claim in bad faith. Combs testified that, after the first allegedly
discriminatory incident, he immediately felt that he had been discriminated
against and that he felt harmed by that discrimination, but he had no idea
that this incident could be considered a legal claim at that time. He testified
that he did not understand, or believe, that he had a claim until almost three
years later, in 2014, when media reports surfaced alleging that the owners of
the P&L District hired white men (“rabbits”) to attack black patrons for the
purpose of getting those patrons thrown out of the P&L District by security
guards (among other illegal plans allegedly designed to dissuade black patrons
from frequenting bars and restaurants connected to Cordish).
As Combs convincingly argues, most people would not consider every
rude action they might experience in everyday society could constitute a cause
of action that must be disclosed in a bankruptcy filing lest it be forever lost.
27 The fact that the Trustee has indicated an intent to abandon any claim the
estate may have as a result of the one pre-bankruptcy filing P&L incident also buttresses
the point that the Combs would not have had a motive to hide the “asset,” since
standing alone, the Trustee believes it likely has little value to administer.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 16 of 23
That would be nonsensical, and indeed, that is not the standard. When a
debtor—especially one with no legal training like Mr. Combs—does not know,
and has no reason to know, that he has a potential cause of action, he should
not be punished for failing to disclose the inchoate claim. And, the Court is
convinced, that is the case here.
At the time Combs filed bankruptcy, he simply had not connected the
dots leading to his discrimination claim, and indeed he was under no
obligation to do so. Only after the second and third incident, coupled with the
publication of the media reports almost three years later, could Combs have
reasonably understood he might have a claim. There is no evidence suggesting
that Combs thought, or realistically should have thought, he had a claim when
he filed bankruptcy.
Based on the evidence, I conclude that Combs did not know that he had
any potential claim at the time he filed bankruptcy. Moreover, I find no
evidence that Combs deliberately changed his litigation position in order to
manipulate the court system. He never knowingly mislead the bankruptcy
court, the trustee, or his creditors by misrepresenting the existence of his
claim. I find no evidence of any bad faith on the part of the Debtors.
One of the few examples Cordish supplies to support its allegation that
Combs tried to conceal his bankruptcy from the district court (or Cordish)
Case 11-21183 Doc# 43 Filed 06/16/15 Page 17 of 23
derives from an objection Combs’ lawyer interposed to an interrogatory in the
Missouri case, in November 2014. That interrogatory requested he disclose all
lawsuits or administrative proceedings to which he had ever been party,
specifically mentioning any bankruptcy cases. The answer Combs filed
included an objection to the interrogatory as not limited in scope, as having no
relation to his claim of discrimination, and as over broad and vague.
No evidence was presented that Cordish tried to compel an answer to
the interrogatory (or that Combs ever lied about filing bankruptcy), so
apparently Combs has not yet been required to provide a substantive response
to the interrogatory. Cordish presented no evidence that it (or the district
court) was mislead by this objection, and while this Court does not prefer this
kind of litigation tactic exercised by some attorneys, it is not per se bad faith
to object to such an interrogatory. More importantly, it provides no support for
Cordish’s attempt to show Combs was acting in bad faith by trying to “hide”
his publicly filed bankruptcy, because only 5 days later, during a deposition,
Combs volunteered that he had filed bankruptcy in response to a question
about stressors in his life. Combs’ willingness to discuss his bankruptcy in
response to a question whose purpose was not even to ask him directly about
the bankruptcy is further evidence that he had no intent to hide the filing.
This Court simply does not buy the argument that this (regrettably)
Case 11-21183 Doc# 43 Filed 06/16/15 Page 18 of 23
normal part of civil litigation—vigorous objections to interrogatories, many of
which should just be answered—somehow proves that Combs was attempting
to mislead the Court. Once again, the Combs were very credible witnesses,
and the Court believed Mr. Combs when he testified he simply trusted his
attorney in how she recommended they deal with the written discovery, and
that he had nothing to hide.
Cordish also alleges that the Combs were acting in bad faith when their
bankruptcy lawyer prematurely filed an amended Schedule B,28 because it
lists the potential value of the discrimination lawsuit as “unknown,” when
during a mediation Combs sought $20 million in damages. Cordish construes
this as another effort to mislead the Court, or perhaps the Trustee.
But once again, Combs testified very credibly that he has no idea what
value a jury would place on his claim, that he was required in the mandatory
mediation process to pick a number, that he picked one that would compensate
him and a class of African Americans who he thinks have been similarly
discriminated against, and that stating the value as “unknown” is completely
28 For future cases, the Court advises Debtors’ bankruptcy counsel that the
proper method is to attach the proposed amended Schedule B as an exhibit to the
Motion to Reopen.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 19 of 23
accurate.29 The large dollar value requested to start a mediation is largely
irrelevant in determining whether a jury will elect to award any damages, let
alone the dollar value a jury or other finder of fact might actually award as
damages. Listing the claim with an unknown value is entirely appropriate at
this stage in litigation and in this type of case, as it provides information to
the Trustee to enable him to investigate the claim and determine whether it is
an asset that is worthy of administration. And in this case, the Trustee has
had a much better opportunity than most trustees would to evaluate the
claim, because the suit has actually been filed, discovery is apparently
complete, a summary judgment motion with much attached evidence has been
filed, and the case is ready to go to trial in fewer than two months. The listing
of the asset with a value of “unknown” provides no support for Cordish’s claim
that the Combs are proceeding in bad faith.
Cordish generally argues that granting this motion to reopen would
amount to allowing Debtors to attack the integrity of the judicial process
because they would be allowed to take inconsistent positions—failing to list
29 Apparently the Western Missouri court declined to certify a class, and Cordish
tried to undermine Mr. Combs’ credibility by stating he had not amended his claim, to
reduce it, after the class action was denied. The Court does not find this fact, if true, an
example of deception by Combs, but instead, a part of the civil litigation process
because Cordish did not suggest why Combs, at this post-mediation point in the
litigation, would have been required to amend his oral damage claim.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 20 of 23
the suit in the bankruptcy court but prosecuting a claim in the district court.
This argument fails, too. In a case like this, where there is simply no credible
evidence that either Dante or Alicia Combs were gaming the system or had
any reasonable cause to know Mr. Combs might have a claim on the date they
filed the bankruptcy petition, the real harm to the judicial system would be to
allow a defendant to totally escape defending against (or suffering a damage
verdict for) an alleged wrongdoing under a judicial estoppel theory.
Finally, Cordish argues that Debtors failed to file this motion to reopen
within a reasonable time. As a preliminary matter, there is a valid question
whether Debtors were under any obligation to disclose the claim at all. As
discussed above, after the first, single incident, the claim was so inchoate as to
not merit disclosure. It is more likely than not that Debtors would not have
had any idea that the incident he was involved in potentially constituted an
actionable discriminatory event on which he could base a claim. Although
Debtor eventually filed suit under 28 U.S.C. § 1981, and § 1981 claims accrue
at the time of the unlawful act,30 the Court finds it implausible that Debtor
would have had a viable claim after the first alleged incident.
In the Tenth Circuit, a claim is an asset of the estate if it “is sufficiently
30 Edwards v. Boeing, 996 F.2d 310, 1993 WL 214566 at *3 (10th Cir. 1993)
Case 11-21183 Doc# 43 Filed 06/16/15 Page 21 of 23
rooted in the pre-bankruptcy past.”31 The decided weight of these claims of
discriminatory treatment come from the second and then the third
incidents—when what appeared to be an isolated incident started to look less
isolated and innocent and more as the start of an emerging pattern. And even
after all three incidents, Combs still filed no action. It was only when, three
years post-petition, Combs learned of the 2014 allegations concerning
Cordish’s possible broader actions, that Combs should have (and did) realize
that the three incidents might constitute a meritorious claim.
Accordingly, because of the way these incidents evolved, they are rooted
in Debtors’ post-bankruptcy future, not their past. The Court will not punish
Debtors for failing to disclose a claim that did not exist, in any viable sense,
until well after the Debtors filed for bankruptcy. Under these circumstances, I
find the motion was filed within a reasonable time. Combs testified very
credibly that he had no reason to understand the one pre-petition incident
could be deemed to be an asset that had to be disclosed, and immediately after
he became aware of his duty to disclose that claim, he moved to reopen his
case to do so. Given the nature of the claim, it is difficult to imagine how he
could have reopened in a more reasonable time.
31 Clementson v. Countrywide Financial, 464 F. App'x. 706 (10th Cir. 2012),
citing Segal v. Rochelle, 382 U.S. 375, 380 (1966).
Case 11-21183 Doc# 43 Filed 06/16/15 Page 22 of 23
Because the Court finds the Combs’ explanations for why they did not
initially list the potential claim in their bankruptcy schedules very credible,
because there is no credible evidence that Mr. Combs even knew he was
taking a potentially inconsistent position in his bankruptcy action versus his
federal court lawsuit, and no evidence presented during the evidentiary
hearing painted Combs as attempting to hide the true facts or undermined his
credibility on these issues, the Court grants the Motion to Reopen to allow the
# # #
32 Again, counsel for Combs should have awaited the ruling on the Motion to
Reopen prior to filing the amended Schedule B (which was filed as Doc. 27, one dayafter the motion). The Court, however, deems this error harmless, and finds itwould be pointless to strike it at this juncture and require it be refiled.
Case 11-21183 Doc# 43 Filed 06/16/15 Page 23 of 23
- Category: Judge Karlin
- Published on 13 May 2015
- Written by Judge Karlin
- Hits: 576
In Re Jones, 14-40876 (Bankr. D. Kan. May 8, 2015) Doc. # 58
SIGNED this 7th day of May, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 14-40876
Denise Annette Jones, Chapter 7
Order Overruling the Trustee’s Objection to Exemption and Denying the
Trustee’s Motion for Authority to Allocate
Debtor’s Federal Tax Refund
The Chapter 7 Trustee, Robert L. Baer (hereinafter the “Trustee”), objects to the
exemption of Debtor Denise Jones’s earned income tax credit (“EIC”) pursuant to § 602315
of the Kansas statutes. The Trustee argues Debtor has waived her exemption
because she delayed claiming the exemption and because of her “pattern of inexcusable
conduct.”1 Because Kansas does not recognize the waiver of state-created personal
property exemptions based on the stipulated facts,2 the Court overrules the Trustee’s
1 Doc. 44.
2 The facts detailed here are either stipulated to by the parties, see Doc. 54, or are
present in the bankruptcy case record.
Case 14-40876 Doc# 58 Filed 05/07/15 Page 1 of 12
objection to exemption and denies his motion to allocate Debtor’s federal tax refund.
I. Background and Procedural History
This case has a convoluted procedural history, which impacts the substantive
analysis of the issues. When Debtor filed her Chapter 7 bankruptcy petition on August
5, 2014, she did not claim an EIC exemption. Four months later, in December 2014
(and four months before any returns were due), the Trustee sent a letter to Debtor’s
attorney requesting that Debtor provide him a copy of her 2014 state and federal tax
returns once they were filed. Debtor’s attorney forwarded a copy of the Trustee’s letter
to Debtor. The Trustee also sent a tax refund intercept letter to the Internal Revenue
Service (“IRS”), requesting that the IRS forward to him, as Trustee, Debtor’s entire
In January 2015, Debtor prepared and filed her 2014 state and federal tax
returns. On January 29, 2015, according to the Kansas Department of Revenue
(“KDOR”) website, the state sent Debtor her $678 tax refund. Shortly thereafter, on
February 12, 2015, the Trustee received Debtor’s intercepted federal income tax refund
of $3855 from the IRS.
The same date the Trustee received the intercepted federal tax refund, he filed
a motion to compel Debtor to provide him a copy of her tax returns. She supplied those
3 The form for Chapter 7 trustees to request intercept of a debtor’s federal taxrefund, titled “Application and Authorization for Internal Revenue Service RefundTurnover to Chapter 7 Trustee Pursuant to 11 U.S.C. § 542,” is available athttp://www.justice.gov/ust/eo/private_trustee/library/chapter07/docs/ch7hb2012/Ch7_IRS_Refund_Turnover_Request_Form.pdf (last visited May 7, 2015).
Case 14-40876 Doc# 58 Filed 05/07/15 Page 2 of 12
returns to the Trustee only five days later—on February 17, 2015, and as a result, the
Trustee withdrew his motion to compel. Of the $3855 federal tax refund, $1548 is
attributable to the EIC; none of the $678 state tax refund is attributable to the EIC.
The next day, on February 18, 2015, the Trustee filed a motion (and an amended
motion) for authority to allocate the federal tax refund between the estate, Debtor and
Debtor’s attorney.4 Within his amended motion, the Trustee proposed to allocate the
$3855 in intercepted funds as follows: $2100.44 to the bankruptcy estate, $1000 to
Debtor’s attorney,5 and the remainder ($754.56) to Debtor.
Two days later, on February 20, 2015, Debtor filed an amended Schedule C, for
the first time claiming her 2014 EIC as exempt.6 The same date, Debtor also filed a
response to the Trustee’s motion to allocate the intercepted funds, arguing that his
calculations failed to take into account Debtor’s EIC exemption.7
In response to Debtor’s amended Schedule C, the Trustee then promptly filed
an objection to Debtor’s EIC exemption, arguing that Debtor waived the exemption
based on her delay in claiming it and her “pattern of inexcusable conduct.”8 Debtor
responded that she should not be penalized for not knowing in advance of preparing
4 Docs. 35, 37.
5 Debtor's attorney claimed a tax refund assignment for $1000, a copy of whichassignment was filed on the same date as the petition. Doc. 4.
6 Doc. 39. This document states Debtor’s 2014 EIC is $1811, although the Court is
unsure where this number comes from.
7 Doc. 40.
8 Doc. 44.
Case 14-40876 Doc# 58 Filed 05/07/15 Page 3 of 12
her tax returns that she would be able to claim the EIC exemption, and that the
information was transmitted to the Trustee in a reasonable time.9 Debtor also filed an
amended response, informing the Court that her 2014 tax returns filed in January
2015 had to be amended, and that she was obligated to return $687 of her federal
refund to the IRS and $85 of her state return to the KDOR.10
The parties have stipulated to the following computations regarding division of
Debtor’s 2014 federal tax returns. Based on the originally filed tax return, without
considering the EIC exemption, the tax refund would be divided as follows: $2100.44
to the bankruptcy estate, $1000 to Debtor’s attorney, and $754.46 to Debtor. Based on
the originally filed tax return, with the allowance of the EIC exemption, the tax refund
would be divided as follows: $1180.12 to the bankruptcy estate, $1000 to Debtor’s
attorney, and $1674.88 to Debtor. As pertinent here, Debtor’s amended 2014 federal
tax return reduced her EIC by $384 and reduced her net refund by $687. Debtor’s
amended 2014 state tax refund still shows no EIC, and Debtor’s net refund is reduced
To date, neither taxing authority has indicated they have accepted the amended
tax returns or demanded repayment of the potentially overpaid portions of the 2014 tax
refunds. In addition, neither entity has filed a proof of claim in Debtor’s bankruptcy
9 Doc. 48.
10 Doc. 50.
Case 14-40876 Doc# 58 Filed 05/07/15 Page 4 of 12
case to recover any portion of Debtor’s 2014 tax refunds.11
The Trustee, as the party objecting to Debtor’s exemption, bears the burden of
proving that the exemption is not properly claimed.12 Kansas has opted out of using the
federal exemptions provided in 11 U.S.C. § 522,13 and in 2011 created the following
exemption of the EIC:
An individual debtor under the federal bankruptcy reform act of 1978 (11
U.S.C. § 101 et seq.), may exempt the debtor’s right to receive tax creditsallowed pursuant to section 32 of the federal internal revenue code of1986, as amended, and K.S.A. 79-32,205, and amendments thereto. An
exemption pursuant to this section shall not exceed the maximum creditallowed to the debtor under section 32 of the federal internal revenue
code of 1986, as amended, for one tax year. . . .
Generally stated, bankruptcy courts “look to applicable state law when determining the
validity of a debtor’s claim to a state law exemption.”14
The Trustee argues that Debtor waived her EIC exemption by her bad conduct
in delaying to claim the exemption until after the Trustee had already intercepted her
federal tax refund. All parties agree that the Supreme Court’s 2014 opinion in Law v.
Siegel15 is the starting point for the analysis of this issue. The debtor in Law filed a
11 The Trustee filed a notice that Debtor’s case was an asset case on October 20,
2014. Doc. 16.
12 Fed. R. Bankr. P. 4003(c); In re Westby, 473 B.R. 392, 399 (Bankr. D. Kan. 2012).
13 See Westby, 473 B.R. at 398–99 (discussing Kansas’s opt-out from the federalexemption scheme and the adoption of the Kansas EIC exemption). All future statutoryreferences are to title 11 of the United States Code, unless otherwise specified.
14 In re Hall, 441 B.R. 680, 685 (10th Cir. BAP 2009).
15 ___ U.S. ___, 134 S. Ct. 1188 (2014).
Case 14-40876 Doc# 58 Filed 05/07/15 Page 5 of 12
Chapter 7 bankruptcy petition and claimed the California homestead exemption for the
equity in his home.16 The debtor reported to the bankruptcy court, apparently
inaccurately, that liens on his home exceeded the value of his house.17 The alleged liens
were ultimately found to be fraudulent, and the Chapter 7 trustee spent more than
$500,000 in attorney’s fees overcoming the debtor’s fraudulent misrepresentations.18
The bankruptcy court permitted the Chapter 7 trustee to “surcharge” all of the debtor’s
$75,000 California homestead exemption to help pay a portion of the fees.19
The Supreme Court acknowledged a bankruptcy court’s general powers under
§ 105(a) and its inherent power to sanction abusive litigation practices, but stated that
“in exercising those statutory and inherent powers, a bankruptcy court may not
contravene specific statutory provisions.”20 The Court then concluded that the
bankruptcy court’s surcharge of the debtor’s exemption was unauthorized because it
contravened § 522 of the Bankruptcy Code, which permitted the debtor to claim his
exemption under California’s homestead exemption law and made exempt assets not
liable for the payment of administrative expenses.21 The Court expressly noted:
[Section] 522 does not give courts discretion to grant or withhold
exemptions based on whatever considerations they deem appropriate.
16 Id. at 1193.
20 Id. at 1194.
21 Id. at 1195.
Case 14-40876 Doc# 58 Filed 05/07/15 Page 6 of 12
Rather, the statute exhaustively specifies the criteria that will render
property exempt. See § 522(b), (d). . . .
Moreover, § 522 sets forth a number of carefully calibratedexceptions and limitations, some of which relate to the debtor’smisconduct. . . . The Code’s meticulous—not to say mind-numbinglydetailed—enumeration of exemptions and exceptions to those exemptionsconfirms that courts are not authorized to create additional exceptions.22
The Court ultimately concluded that no federal law provided “authority for bankruptcy
courts to deny an exemption on a ground not specified in the Code.”23
The Supreme Court then noted, however, that “when a debtor claims a
state-created exemption, the exemption’s scope is determined by state law, which may
provide that certain types of debtor misconduct warrant denial of the exemption.”24 The
Court opined that bankruptcy courts may, therefore, apply “state law to deny an
exemption on a ground not specified in the Code.”25
As a result of the Supreme Court’s recent holding in Law v. Siegel,26 it is clear
that there is no federal authority to deny Debtor’s EIC exemption due to her alleged
22 Id. at 1196.
23 Id. at 1197.
24 Id. at 1196–97.
25 Id. at 1197. The Supreme Court also pointed to a variety of other remedies thatexist to respond to a debtor’s misconduct, including 1) the denial of discharge provisions inthe Code in § 727(a)(2) through (6); 2) the ability of a bankruptcy court to impose sanctionsunder Federal Rule of Bankruptcy Procedure 9011 for “bad-faith litigation conduct” or otherlitigation sanctions under § 105(a) or the court’s inherent power; and 3) the possibility ofcriminal prosecution for fraudulent conduct. Id. at 1198. The Trustee does not seek any ofthese remedies here.
26 The Tenth Circuit Court of Appeals has not yet addressed or analyzed theSupreme Court opinion in Law v. Siegel. The Tenth Circuit Bankruptcy Appellate Panelhas addressed the case, but only as to whether it should be extended to deal with therecharacterization of a claim, see Redmond v. Cimarron Energy Co. LLC (In re Alternate
Fuels, Inc.), 507 B.R. 324, 333–34 (10th Cir. BAP 2014), an issue not present here.
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bad faith delay in claiming the exemption. But, if the Trustee could point to some
Kansas law that permits the exemption to be denied under these facts, then the
Trustee could proceed.
The Trustee relies on three Kansas cases to support his position that Kansas
would recognize waiver of the EIC exemption under the facts present herein. The first
Kansas case cited by the Trustee is Frey v. Butler,27 a very old Kansas Supreme Court
case. In Frey, a judgment was obtained against a debtor, and the sheriff executed on
that judgment by taking the debtor’s horses and other personal property.28 In Kansas
at that time, an exemption existed for “a span of horses.”29 At the time of the sheriff’s
levy, the debtor informed the officer that he would not then claim his full exemption,
and when the debtor later (but before sale) attempted to claim his full exemption, the
sheriff claimed the debtor had waived the exemption.30 The Kansas Supreme Court
first noted that the claim of exemption was properly made because it was asserted
prior to sale, further citing the “liberal view” in Kansas for claiming exemptions.31
Importantly, the Court stated that, although it is possible for a debtor to waive his
exemption, the mere silence or failure to assert the right to an exemption would “not
27 52 Kan. 722 (1894).
28 Id. at 722.
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ordinarily constitute a waiver.”32 The Court went on to hold that “[u]nless the debtor
has, by express declaration or unequivocal acts, waived the privilege, he may exercise
it at any time prior to sale.”33 In that case, because there had been no unequivocal
waiver, and the debtor had left open the possibility of claiming the full exemption
later—and did, in fact, claim the exemption prior to sale—there was no waiver.34 The
Trustee apparently discusses this case only for the proposition that it is possible for a
personal property exemption to be waived in Kansas.
The Trustee next relies on Iowa Mutual Ins. Co. v. Parr,35 a case that concludes
that a Kansas debtor cannot waive his constitutionally established homestead
exemption.36 The Trustee cites the case for its brief discussion that Kansas personal
property exemptions are established by statute and thus could be waived, and that an
individual can dispose of exempt property as he or she wishes until that property is
“seized” in execution.37
And finally, the Trustee relies on State v. Goering.38 In Goering, a criminal case,
the defendant was arrested for obstructing and ultimately assaulting officers who were
35 189 Kan. 475 (1962).
36 Id. at 481–82.
37 Id. at 478–79.
38 193 Kan. 307 (1964).
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levying upon his personal property. He claimed the officers were unlawfully attempting
to levy on exempt property.39 The Court recognized prior decisions recognizing waiver
of personal property exemptions: a debtor could sell exempt personal property, pledge
exempt personal property as security, or turn over exempt personal property to an
officer and permit sale of that property in satisfaction of a judgment execution.40 The
Court ultimately upheld the jury’s finding that the defendant had waived his
exemption in a vehicle when he told the officers that they could take the vehicle when
they came to his property to execute the judgment at issue, and as a result, upheld the
defendant’s conviction for resisting the officers.41
As should be clear from this review of the case law relied upon by the Trustee,
none of the cited cases actually support the Trustee’s position on the stipulated facts
of this case. The Trustee here sent a routine letter in December 2014 reminding Debtor
to provide him copies of her 2014 tax returns once completed. This letter is a routine
matter, presumably done in each and every one of the Trustee’s cases, to timely remind
debtors of their responsibility to provide a copy of pertinent tax returns to the Trustee.
Debtor then filed her tax returns in January 2015, three months before they were due
in April 2015. Within a month of learning she was actually eligible for the EIC, Debtor
claimed the EIC exemption on February 20, 2015.
The cases cited by the Trustee all discuss the affirmative waiver of a personal
39 Id. at 307–08.
40 Id. at 311.
41 Id. at 311–12.
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property exemption. The stipulated facts here simply do not constitute such a waiver.
While it would have been preferable for Debtor to exempt her potential EIC earlier,
Debtor was actually rather prompt in claiming the EIC upon learning that she was
eligible for that exemption. Like in Frey, Debtor here properly claimed the exemption,
as Federal Rule of Bankruptcy Procedure 1009(a) allows amendment of a debtor’s
exemptions on Schedule C “as a matter of course at any time before the case is
closed.”42 And she made no “express declaration or unequivocal act” waiving that
The Trustee’s reliance on Iowa Mutual Ins. Co. is also misplaced, as it provides
no basis for finding a waiver here. There has been no seizure in execution of some
judgment by the Trustee—the Trustee merely intercepted Debtor’s tax refund, as the
Trustee does regularly in all his Chapter 7 cases. Similarly, the Goering case is
unhelpful to the Trustee, as this Debtor never affirmatively waived the exemption as
the debtor did in that case.
The Court’s independent research yields no Kansas case law supporting the
Trustee’s position here. As the Supreme Court has instructed that the Court must look
to Kansas law to determine whether denial of a state-created exemption would be
permitted based on the facts at issue,43 and no such Kansas law is present supporting
a finding of waiver based on the facts of this case, the Trustee’s objection to exemption
42 See also Calder v. Job (In re Calder), 973 F.3d 862, 867 (10th Cir. 1992) (statingthat Rule 1009(a) permits amendment as a matter of course, but that amendment may bedenied “if there is bad faith by the debtor or prejudice to creditors”).
43 Law, 134 S. Ct. at 1197.
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must be denied. The Trustee has not carried his burden of proving that Debtor’s EIC
exemption is not properly claimed.44
Because the Trustee’s motion to allocate Debtor’s federal tax refund does not
take into account Debtor’s EIC exemption, it must also be denied. The Trustee should,
within fourteen days, file a new motion to allocate and disburse Debtor’s intercepted
federal tax refund that takes into account Debtor’s EIC exemption if he seeks to retain
any portion of that refund for the estate.45
The Trustee’s objection to Debtor’s exemption of the EIC46 is overruled and his
motion for authority to allocate Debtor’s federal tax refund47 is denied. If the Trustee
intends to retain any portion of the intercepted refund, he shall file a new motion for
authority to allocate Debtor’s federal tax refund within fourteen days.
It is so ordered.
# # #
44 Fed. R. Bankr. P. 4003(c); In re Westby, 473 B.R. 392, 399 (Bankr. D. Kan. 2012).
45 Debtor’s brief did not address her amended tax returns or the amounts she mayowe as a result thereof. As a result, the Court will likewise not address those amended
returns here. The parties stipulate that neither the IRS nor the KDOR have accepted theamendments or demanded repayment, so the status of the amendments is in flux.
46 Doc. 44.
47 Doc. 35, as amended by Doc. 37.
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